Crises, Crashes and Speculation: Hegemonic Cycles of Capitalist World-Economy and International Financial System Author(s): Krishnendu Ray

Source: Economic and Political Weekly, Vol. 29, No. 31 (Jul. 30, 1994), pp. PE86-PE104 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4401556 . Accessed: 03/02/2011 13:02
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Crises,

Crashes

and

Speculation

Hegemonic Cycles of Capitalist World-Economy and International Financial System

Krishnendu Ray This article sketches historically the capitalist world-econotny from the 17th century to the present as seen from the vantagepoint of international finance duringperiods of hegemonictransitions.Thediscussion here is at a level removed from the everydaypractices o productionand consumptionandfrom muchof what is called 'marketeconomy'. Itfocuses on the view from the successive cores of the capitalist world-economysuch as Amsterdamin the 17th century,Great Britain in the 19th centuryand the UnitedStates in the 20th century.It gives attention to those events and processes that had systemic ramifications,largely ignoring those of regional or local significance. The attempthere is to describe the transitionsat the apex of a world-econzomy consisting of several differentregional hierarchiesoffinance bothpublic and andfinally to a tripolar private,from Amsterdamto London,then,from Londonto a moreglobal system led by New York, world led by Tokyo. 1 Introduction
'T4Ecapitalistworldecoonomy fragmented is intopolitically discretejurisdiction.s: states. Competition for capital between states is necessary for the system to reproduceitself butso is the need for order.It is scholarslike
Leopold von Ranke, Otto Hlintze, and Max
hais reniined one of the most co011petition iml)ortant imotives of the capitalist protectionisiinthat emerged then and today continues in different formns. Neither the trade nor the monetary policies of the modern states-those policies most closely linked to the central interests of the present ecoiionoic system-can be undlerstoodwithout this peculiar political competition and 'equilibrium' among the European states during the last five hundred years-a phenomenon which Ranke recognised in his first work-as the world-historical distinctiveness of this era (Weber 1922/1978:353-54].

Weber who first drew attention to the rela-tionshipbetween capitalism andthemoderni interstate system. Max Weber added the interstate system to lhis list of necessary structural conditions for the emergence and 'Hegemony' is the process through which reproductionof modern capitalism. Weber that 'equilibrium' is established. In adoptwrote in his General Economzic Historv: ing Gramsci's concept of hegemony for the This competitive struggle [between states in interstate system we are refelTing to the early modern Europe] created the largest power of a state to exercise governmental opportunities for modern western capitalfunctions over a system of states. Hegeism. The separate states had to compete for mony is the additionalpower thataccrues to mobile capital which dictated to them the the dominantstate by virtue of its capacity conditions under which it would assist them to pose on a universal plane all the issues to power. Out of this alliance of the state with around which conflict rages [Arrighi capital, dictated by necessity, arose the na1990b:366-67;Modelski 1987]. Hegemons tional citizen class, the bourgeoisie in the modern sense of the word. Hence it is the establislhlhegemonicregimes with support of those thatarehegemonised(suclh westas closed national state which afforded to capiern Europeunider Americanhegemony)and talism its chance for development-and as by excluding those that cannot be long as the national state does not give place hegemonised(such as the USSR). Nonetheto a world empire capitalism also will endure less, lherewe are mainly interested not inl [Weber 1927/1981:3371. In Econotmy Society Weber elaborated: hegemonic regimes but in the transition and betweenthemso as to illuminatethepresent Finally, at the beginning of modern history, transitionfrom US hegemony. the various countries engaged in the struggle Thiisis a historicalsketclh the capitalist of for power needed ever more capital for poworld-economyfrom the 17thcenturyto the litical reasons and because of the expanding present as seen from the vantage point of money economy. This ressulted that memoin internatiohralfinance during periods of rable alliance between the rising states and hegemoniictianisitions.Let us clarify whlat the sought-after and privileged capitalist to powers that was a major factor in creating we do not intenid do inlthis paper:one, our inodern capitalism and fully justifies the discussionihere is a level removed tfrom the evetyday practices of productionand condesignation "mercantilist" forthe policies of that epoch... At any rate, from that time dates sumption and fiom muclhof what Braudel that European competitive struggle between characterises as the 'market economy' large, approximately equal and purely politi(1977); two, it is focused exclusively onithe cal structures which has had such a global view fiom the successive cores of the capiimpact. It is well known that this political talistworld-economysuch as Amsterdam in

the 17th century, Great Britain in the 19th centuryand the US in the 20th century,' and three, it gives attentiononly to those events and processes that had systemic ramifications, largely ignoring those of regional or local significance. Our attempt here is to describe the transitions at the apex of a world-economy, consisting of several different regional hierarchies of finianceboth public andprivate,from Amsterdamto London, then, from London to a more global system led by New York, and finally to a tripolarworld led by Tokyo.2 In Section II we brieflydescribe the distinctive aspectsof the international financial network under the Dutch and then the transition to the British-centred world-economy which roughlycovers theperiod fromcirca 1650 to 1795. Similarly, in Section III we first describe the British system and then the next expansion,retrenchment reorganisation anid of the internationalfinancial system andthe resultantinstabilities due to British decline and the inability and/or unwillingness of New York to take the lead. This transition, like the previous one, was characterisedby a long-lasting crisis that effected the banking system, andthe currency,loan andstock markets and lasted from ca 1890 to 1945. The financial system bottomed out in a series of crisis in the interwaryears. Consequently, it was only underthe leadershipof the American state that the international financial system was stabilised. Keeping with our focus on transitions, in Section IV we briefly describe the BrettonWoods system, moving quickly to a description of the present transition with all its associated symptoms of a debt crisis, an emergent banking and currency crisis and a volatile stock market. Here we also compare the present transition with the transition from Dutch to British and Britislh to American hegemony, drawing analogies and pointing out differences. In this section we also attempt to outline the secular trends in

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international finance in terms of, for instance, w expanding system, deepening institoti6nalisationand changing directionality of lotig-term financial flows. Let us first provide a thumbnailsketch of the mainafeatures of the transitions under discussion. In the 17th century,Amsterdam plutocrats could establish control over the financial flows of the capitalist worldeconomy because of their monopoly over Baltic suppliesandfine Asian spices through which they appropriatedthe bulk of precious metal coming into Europe from Iberian America. Sitting on monetaryflows of merchant-banksuchmagnitudeAmsterdam ers established the wisselbank to manage it. From the middle of the 18th century, with downward pressure on profit rates in the main circuits of their commerce, Dutch into withdrew financeandchose businessmen to become the bankersof the world [Braudel mobilised 1984:243,246]."Surpluscapital", through the stock exchange from various trademonopolies, was then lent to European states involved in the most extensive interstate conflict between 1652 and the American War of Independence to make further profit. At the same time, because of a combination of processes that had been in the making over a long time, London was fast overtaking Amsterdam as the centre of a more complex array of financial institutions. Expanding transatlantic trade that English merchantsand shipperscontrolled, decliningprofitsin traditionalDutchstrongholds like the Baltic trade that diverted the flow of Dutch capital to British enterprise, and the flow of tribute from India with which the British boughtbacktheirnational debt from the Dutch, were the most importantprocesses at the root of the shift of the financial centre from Amsterdam to London.The UnitedProvinceshadby themiddle of become a protectorate of the 18thceeniury theBritish state. Real competition for world power was between France and GreatBritain that was decisively settled in favour of the latter with the Treaty of Paris in 1763 when the French were ousted from North America and India. Although the locus of world liquidity began to shift from Amsterdamto London between 1690s and the 1720s, the breakdown of the financial patterndominatedby the Dutch did not occur until the 1770s. The newBritish regime was not establisheduntil after the restoration of the sterling-gold standard atparin 1821. Thelong destabilised international financial networks bottomed out in a series of cr'isis between 1763 and 1783. The financial instabilities of the,l8th centurywerea productof thereconfiguration of trade networks and the insufficiently developed institutionsof controlfor thenew stock markets and bank mon~ey. tradecircuits, Monopolies in transatlantic especially in the slave trade, tribute from

division of India, and the new international labourthat made GreatBritain "the work" shopof theworld weretheprocessesthrough whiclh "surplus capital" came into Great Britainandwaspumpedout to therest of the world through the via media of the city financierssuch as the Rothschilds.Simultain neously, 'surplus capital' accumutlating different regions of the British national economy wasmobilisedby thebranch-banking network and pumped out to the rest of the worldonce againthroughthemediumof the city. Britishfinanciers,situatedon such newly profitable flows of the 18th century, quickly moved to consolidate their advantage by setting up institutionsof control. At base of theBritislh system of controlwas thie and domestic credit-managemenit resource mobilisation through the national branchbanking network governed by the instituof tional nexus of the City-Treasury-Bank England and at the apex was international credit- and currency-management through By the sterling-goldstandard. the end of the 19th centurywhen downwardpressuresincreased on profit rates in tradeandproduction Englishmerchantsreplicatedthe Dutch preference for liquidity at about the same juncturein theirhegemoniccycle andchose to becomethe financiersof the worldinvesting muchof theirmoney in theNorthAmerican railroads. This era has often been as characterised one of 'finance capital' and 'imperialism'. We will see how this 'stage' of finance capitalism is recurrent in the history of the capitalist world-economy. Increasing competition that eroded the gold monopoly of the Bank of England at home and abroadand the resultantcollapse of the sterling-gold standardin the early decades of the 20th century marked yet anotherphase of long-lasting financial instabilities in the capitalist world-economy that bottomed out in the inter-war years. Consequently, the financial centre of the capitalistworld-economyshiftedfromLondon to Wall Street and the FederalReserve system. Repeating anotherearlier pattern, the British, by the end of the 19thcentury, were no longer the main contenders for world power. The competition was now between Germanyandthe US and the issue was decisively settled in favour of the latter only in the course of the two world wars by 1945. The creation of a continental national economy throughcompetitive industrialisationwas the fundamentaladvantage that the American state had in the the struggle for dominance wlhiclh German state-the other main contenderfor world power-could not replicatebeing hemmedin in the middle of EuIope. Once again, though New York came to acquire increasing importance in the late19th centuryfinancial network tlhelBritish regime did not collapse until the 1930s and the US regime was not put in place until thle

1950s. General financial instability since the 1890s gave way to the terminal and transformativecrisis of the 1930s: a period of systemic chaos. At the end of this period new arrangementsof governance were instituted that included the US Federal Reserve System, Wall Street financiers, seMonlected central banks,the International etary Fund (IMF), and the World Bank (WB). These were connected in a hierarclhical relationship underwhatcame to beknown as the Bretton Woods system. With the erosion of US industrial dominance by the 1960s, the Bretton Woods system was transformed into a genuinely multilateral system of'control. Financiers based in east Asia, under Japanese leadership, became the biggest'creditors and this new region became the powerhouse of the capitalistworld-economy.Consequently,the international financial system witnessed increasing instability since the late-1960s and the pace of change seems to have hastened in the 1980s and 1990s. In the 1980s, we could recognise the rebirthof finance capital at an analogous juncture of the US hegemonic cycle. "[Every] capitalistdevelopment of this orderseems, by reachingthe stage of financial expansion, to have in some sense announcedits maturity:it [is] a sign of autumn",arguedBraudel,commenting on the cyclical rebirthof finance capital at the end of each regime of accumulation (1984:246). Instabilities in the international financial system has increased but it is an open question whetherthe 1980s and 1990s constitutea period of systemic chaos analogous to other such periods before, and whetherwe are witnessing the birthof a new hegemon. It is without doubt thattoday old regimes and institutions are being transformed out of recognition and the question is what would they look like at the end of these changes and could these transformed or newly formed institutions establish control over the emergent system without the traumaof a terminalcrisis of the old regime Itremainsto be seen whiether andinstitutions? it would be necessary to go through dramatic crises and wars, thathave been necessary coirelates of past hegemonic 'transitions, before any new regime is instituted. Ilave the riclhand powerful learnt any lessons anddo they havethe institutionalmeans to avoid repeating suclhcatastrophic 'mistakes'? Hegemonic transitions in the past have been associated with the pre-eminence pf finance capital and long-lasting financial crises. Oldpattern.s regimes of tradeand and financehavebeenreplacedandreconfigured andin theprocess new centreshave replaced old ones as anchorsof emergent systems of accumulation.Volatility andinstabilityduring transitionshave increased the possibility of making quick speculative profits and have oftcn even made it neccssary to specu-

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late as a method of hedging against risks in uncertainmarkets.Financialexpansion and crises aretwo sides of the same coin. Hence, before we launch into any detailed description of hegemonic transitions we need to elaborate on the cyclical pre-eminence of finance capital and to define what we mean by a 'financial crisis'. As regards the cyclical pre-eminence of finance capital, Braudel, taking issue with Ililferding's characterisation of late-19th century capitalism as a new stage of "financecapitalism" wrote: "Financecapitalism was no newborn child of the 1900s; I would even argue that in the past-in say Genoaor Amsterdam-following a wave of growth in contmercial capitalism and the accumulation of capital on a scale beyond the normalchannelsfor investment,finance capitalism was alreadyin a position to take over and dominate, for a while at least, all the activities of the business world" (1984:604).3 The tendency towards liquidity preference at the end of a phase of materialexpansion usually comes aboutby way of decisions by certaincapitalistgroups and organisations, especially those of the old centres who have lost their competitive edge or are ill-positioned or ill-disposed to fight the competitive struggles, to voluntarily pull out and restrain themselves from investing furtherwhile theirprofits are still high [cf Hicks, 1969:58-59, and passim]. Some may withdraw from production but still linger a little longer in the market for intangible assets, such as shares, so as to makea quick speculative profit.Manyof the investors who withdraw in the,ripeness of timemay turninto speculatorsandbe instrumentalin leading the "bubbles" in thesecurities maxket. Hlerethey need to delicately time yet anotherwithdrawal from such intangible assets so as to leave the market when speculative profits are high, sometimes triggeringthe collapse of the bubble. Good speculatorsare the best capitalistsand that is why so few capitalists can resist the temptationof playing the high risk market during tumultuous times. This withdrawal of capital in the ripeness of time or what Arrighicalls the "self-protectionof capital" finds typical expression in rebirths in the financial sector (1990). Hence, crisis in the 'real' sector and affluence in the financial sector characterise the ends of cycles of accumulation [cf Sweezy and Magdoff 1988]. Consequently, the capitalist enterprises thatpull out of tradeandproductionin the ripeness of time have all the liquidity they need to take over at bargainprices the assets of the enterprises that miscalculated the conjuncture and got stuck with less profitable assets. This is the time for takeover battles and corporate buyouts. Howmay c_pitalists ever, at this point finance attempt to lead the mass of money capital out of tradeand productionaltogether.His-

torically, leading states, that have a tendency to be in chronicfinancial difficulties because of -their over-expansion (because states are driven by power-maximisation ratherthanprofit-maximisation),have prooutlet for such vided the most remunerative capitalists [cf Hicks 1969:81,85]. Thus, at the end of each cycle Hobson's "finance capitalists" resurfaceto take charge of the process of capital accumulationunderconin ditionsof retrenchmient the "real" sectors [Arrighi 1990:17-23]. Older hegemonic states that are especially over-extended by this time in their hegemonic cycles absorb money capitalto momentarilyrefurbishthe dying regimes beforethatproves to be inadequate. Hegemonic regimes in the past have usually overseensecularexpansionsof thecapitalist world-economy,be it the 17thcentury articulationof the Atlantic economy to the Indian Ocean economy through the via media of the Dutch East India Company (VOC), or the 19th century globalisation of the capitalistworld-systemunderBritish hegemony, or further industrialisation, commodification and proletarianisationin the 20th centuryunderUS hegemony That is because newer regimes are nothing but improvementsin the organisationof trade and productionthat in themselves become the expansionaryforces [cf Hicks 1969: 56 and passint]. During expansionary phases profit rates increase and based on that expectationsof futureincomes increase,leading to expansionin credit andincreaseduse of short-termdebts to finance investments. Due to eventual overcrowding and falling ratesof exploitation(as supplycosts including labour-costscatch-up), profit rates begin to fall andas thecycle turnsinterestrates begin to increaseunderpressureof increasing demand at the old centres. In such an environmentbtsinesses find it difficult to sell their commodities as limits of current are consumptionstructures reached.Hence, it is simultaneouslya crisis of overproduccrisis, a crisis of tion, an underconsumption the rate of cxploitation, and most impora tantlyforourpurposes, creditcrisis marked Creditliquidationensues by retrenchment.4 and interest rates go up as the demand for cash escalates and many firms are faced with bankruptcyand/or are forced to sell assets and offload commodities at falling prices. The crisis properis triggeredby an and/ora decievent like a majorbankruptcy sion by a majorbill brokeror centralbanker that credit is too extended and its resultant refusal to honourpaperor tightenmonetary policy. Financialcrises happenmore often than hegemonic transitions and since the IndustrialRevolution have been associated with business cycle peaks. For instance, in the 19th century there was a credit crisis almost every 10 years (1816, 1826, 1837, we 1847, 1857, 1866 and 1890).5 Hlere, are

interested only in those long-lasting crises that seem to coincide with hegemonic transitions. A financial crisis in our sense occurs only when it effects the main centres of capital accumulation, is deeper than the recessions of the usual business cycle, and remainsfestering througha numberof credit cycles because of problems of managingthe 'usualcrisis'. A hegemonic transitionmakes a quickrecoverydifficult becauseof incompletely formedinstitutionsof governanceof financialregime and theemergenttrade-and the absence of a lender-of-last-resort. The
fundamental reason for the crisis to fester is

that credit- and currency-managementby the old financial centre is inadequate and new centres are unable to.steadythe system of accumulation. A crisis in our sense is defined by exchange rate volatility; run on major banking networks, a crash in the major stock markets; and an international debt crisis. All three hegemonic transitions under discussion have been characterised by crisis in one or more of these spheres.The transitionfrom Dutch to British hegemony being the least clearly defined, in these
terms. II

Transition from Dutch to British Hegemony (4ca 1651-1795) The merchant-bankers of Amsterdam never managed to establish a hegemoniq regime of international finance. Instead, finanthey merely dominated the trade-and cial flows of the 17th century European and established in world-economy Amsterdam the institutional funnels that furtheWdthe city's role as the entrepot of the world-economy Monopoly over the Baltic tradeand displacement of the Portuguese as thepre-eminentEuropeanpower in the Indian Ocean trade were the basis on which Amsterdam plutocrats established control over the bullion market, set up the stock exchange and financed their statebuilding activities. As a consequence they continued to profit from these institutions long after their decline as the pre-eminent centre of trade and industry. The Dutch 'enjoyed' a- long decline, as Hicks put it (1969:60). Amsterdam was the commercial and financial entrepot of the city-centred worldeconomy of the 17th century.6 Precious metal came in from Iberian America to Amsterdamto settle Dutch surpluses with Spain and Portugal and was deposited by Amsterdamgrainmerchantsandshippersin the wisselbank.This bullion played a crucial role in supplying the means of payment for the entire system.7 It was not only Dutch deficits with the "external arena" thatwere paid from the bullion stock in Amsterdam but also English deficits. English East India Company (henceforth EIC) agents in

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Amsterdam,for instance, purchasedDutcl silver ducatonsfor the Asia trade,which, in the clcsing years of the 1690s amountedto no less than 7-8 million guilders a year [Wilson 1949:160; Attman 1983:54]. Then, the precious metal stock of the Amsterdam wisselbank played an important role in stabilising the Dutch currency, hence transforming it into an 'initernationalcurrency' of some importance(though never a riValto the Spanish rial).8 Arguing for the reestablishmentof thewisselbankin 1802, the FrenchConsul in Amsterdamexplained the role of the Bank accurately Preciousmetals come'to Europefrom the but New World,not in a constantstream, at burstsof a varyingintervals,in theirregular torrentratherthan the smootherflow of a war river.Atthe endof a maritime whichhas of keptthetreasures the minespentupin the colonies, Europeis SpanishandPortuguese withgold andsilverin innundated suddenly far'abovewhatis needed,so that quantities they woulddeclinein value if theywereput ' into circulatio all at once. In suchan evendeposited tuality,the people in Amsterdam the metalin ingots in the Bank,whereit was took a forthemait verylow cost,andthey k-ept it out a little at a time to send to different as countries the increasein the ratewarrants it. This money, then, which if allowed to flood in too rapidlywould have drivenup exceedingly,tothegreat pricesof everything loss of all who live on flxed and limited distributed through incomes,was gradually manychannels,giving life to industryand trade.TheBankof Amsterdam, encouraging to then,didnotactonlyaccording thespecial interestsof the tradersof the city; but the wholeof Europeis in its debtfor thegreater of stability'ofprices,equilibrium exchange and a moreconstantratiobetweenthe two metalsof whichcoin is made;andif thebank it is not re-established, couldbe saidthatthe great system of the trade and political economyof the civilisedworldwill be with[cited out an essentialpartof its machinery in Vilar 1976:209] Yet, Amsterdam was not only the major entrepotof precious metal andthe site of the institution that controlled its flow (the wisselbank) but also the most important money market in Europe. The stock exchangewas a productof the charteringof the VOC and it was the "blue chip" company that drQve the Amsterdam market. Chaudhuristates that everyone agreed that the stocks of the two great East India Companies (the VOC and the EIC) acted as leaders in the Amsterdam and London exchanges.Daniel Defoe, for ex ample,pointed out that though there were many different kinds of privateshares in the marketthen, it was the East India stock that "was the main point" [Defoe 1719:13-14citedinChaudhuri 1978:417]. Through the bourse (thle stock exchange), capital was recycled from profitable but stagnantOrcontractingtradenet-

works suclhas the Baltic to expanding networks, and reshiuffledamong business and governmentalunitsdependingon theirprospective solvency and profitability. The Amsterdam stock exchange, which in the early 17thcenturyfunctionedas a powerful suction pump that drew 'surplus capital' from all over Europeinto Dutchenterprise, a centurylaterturnedinto anequally powerful machine that pumped Dutch 'surplus capital' into English enterprise [Arrighi 1990:50,77]. Other than recycling and reshuffling 'surpluscapital', the Amsterdam stock exchange made possible the mobilisation of relatively small capitals at home on an unprecedentedscale, and coloPierre Goubertacnial expansion abroad.9 curately sees the role of the Amsterdam stock exchange in the 17thcenturyas analogous to that of Wall Street in the 20th century[ 1970:23-54,fromWallerstein1982: 111, n 123]. More on that later. After the wisselbank and the stock exchange, thecreationandmanagementof the national debt was the third importantelement in the financial arrangementunder Duc-h dominance. As stated earlier, the VOC did mobilise a new mass of money capital, yet as far as the relatively small privateinvestorwas concernedtheprincipal clhannelwas government securities and it was only when these companies got involved in the consolidation of the national debt thata muclh largerpool of investorsgot interestedin them. And before the birthof the modern welfare state the national debt basically involved defence costs. Dutch finance capitalists found an outlet for the 'surpluscapital' accumulatingin the hands of Amsterdammerchantsin the needs of the state. If these large pecuniary surpluses were reinvested in the networks of their origin, for instance in the Baltic trade, the most likely outcome would have been an upwardpressureon purchaseprices of Baltic supplies and/ora downwardpressureon sale prices-that is why we call it 'surplus' capital [Arrighi 1990:39-441.1'Fortunately for thieDutchmerchantsinvolved, this surplus capital found an outlet in a numberof avenues: (a) in investments in land; (b) in tradeexpansions to the Orient;and (c) most importantly,in loans to the Dutchandeventually the English state.'" Protectionhas always been a very expensive business. Fortunatelyfor Dutch financiers Early-Modern Europewitnessedaparticularly dramatic escalation in costs of wars and the provision of protection."2A state's capacity to provide protection depended in the first instance upon an adequate supply of men and munitions which in turn depended on sufficient money and properorganisation [McNeill 1984:vii, 117, 144ftf.'3 A political-fiscal revolution was costs of military-naval needed to pay for thle expansion on such a scale. It is in the realm

of state financing through public debt that the Dutch proved to be the leaders. The capacity for an unprecedentedexpansion of the debt-revenue ratio funded by indirect taxes was the financial revolution,'4 and a political structure that handed the reins of the state to the same urbanplutocrats who financed the public debt was the political revolution.15 TogethertheydefinedtheDutch lead. Rasler arid Thompson correctly generalise, that ... the earlier winners in the struggle for owed a significantproporworldleadership tionof theirsuccess to theirabilityto obtain credit inexpensively, to sustain relatively large debts, and generally to leverage the initiallylimitedbase of theirwealthto meet their staggering military expenses. Conversely, the deeat or demise of the earlier losers, despite the possession of relatively partly extensiveresource bases,canbetraced to their failure to generate or maintaina sufficientlycompetitivefinancialcapability
(1989:89).16

By shifting into finance from production andtrade,Dutchcapitalistshadmerely postponed the inevitable end of their dominance. The transition from Dutch.domination of the internationalfinancial networks to British hegemony was a long affaircomparedto subsequenthegemonic transitions. That was perhaps because it took a certain degree of maturity of the capitalist worldeconomy before any genuine international regime could be instituted. It took'a long time before the British could institute a financial system for the world-economy, whereas the Dutch had more or less merely dominatedthe currentflows. That is also the main reason why this transition did not exhibit all the featuresof a 'financial crisis' as defined in the introductoiysection of this paper. As there were, for instance, no institutionalised exchange-rate systems in place, nor for that matter the extensive use of bankmoney, or 'thirdworld nations' to be indebted,certain typical features of a crisis were missing. Equally importantly,the vely natureof the available data (in the absence of national accounting methods) makes it impossible to fully describe the analogous crisis in the same conceptual terms. Nonetheless, it can be argued that the most definitive features of this transition came in the 18th century, especially between 1690 and 1773. The challenge first took shape in the sphere of trade. The Eilglish did not directly boot out the Dutch from the position of dominance. Instead, of theywerethebenefactors areconfiguration of trade, especially the Americanisationof thecapitalistworld-economy.Theprocesses that led to the relocation of Enlglandat the centre of a new regime of trade was in the making over a long period of time. In a symbolic way the eviction of the Venetians once controlled the and thleHanse, xvhohlad

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main English export of cloth, between 1533 anid1598 marked the beginning of a concertedattemptby Englishmerchantstomove from the periphery towards the centre of a new trading system. The Dutch still controlled Europeantradeand were the first to challenge the Iberian powers in the New World and the Portuguese in the Far East. For more than a century English and French forays were a distant second to the Dutchchallenge but slowly the foundations for English pre-eminence were laid out [Minchinton1969:3]. There were a number of factorsin the eventual English victory on the Atlantic,many of which the English had done nothing to deserve. First, was the location of Great Britain as an island on the currentsof Atlantic trade thatprovided her with locational advantages of protection and intermediation. Second, there was the long-term effect of Iberian-Dutchhostility on the Atlantic which ended up (a) by inadvertentlyprotectingthe English from Spanish navalmightby anchoringa 'navalscreen' when the Dutch seized Curacaoin the Caribbean in 1634 [Wallerstein 1980:64]; and (b) by driving the Portugueseinto 'buying' protectionfrom the English at terms highly favourableto the latter, that half-a-century laterwas formalisedin theTreatyof Methuen (1703), tlrough which the English gained access to Brazilian supplies andPortuguese markets.Third,settler colonialism in North America, the otlher importantfactor in later English pre-eminence in the Atlantic trade, happenedto be spearheadedby immigrants fromEngland,Wales, Scotland andIreland. The Dutch could never compete with the English in settling North America simply because fewer Dutchmenwere available as a result of relative labour scarcity [Boxer 1965:109]. Moreover, higher standardsof living made immigrationacrossthe Atlantic unattractivefdr most Dutch. Most of the colonial population,andnearly all the wellto-do merchant, planter and professional classes, were of British origin, who over generations became accustomed to take manufacturesfrom British sources (so important for the Industrial Revolution) and sell through British factors (so important for the transformation GreatBritain into of the new entrepotand the centre for services in the 18th century capitalist worldeconomy) [Davis 1969:115]. Then there were purposive mercantilist
actions of wars and protection that the En-

glish state initiated so as to come to dominate the Atlantic trade. First came the protectionist measures and then throughthem the benefits from wars and peace treaties. Expansionof the English shippingindustry, so crucial for protectionof her island status and the establishment of a sea-borne empire, came in the 17th and S1thcenturies as a combined result of strongstate protection in the form of thleNavigation Acts of 1650

and 1651, the Act of 1660, Act of Fraudsof 1662 and the Staple Act of 1663; '7 the coastal coal trade; the Newfoundland and Greenlandfisheries; and the expansion of the Mediterranean and African trades [Minchinton 1969: 11; Davis 1962]. The unequivocallymercantilistNavigationActs sice 1651 directedmuch of the commodity flows into the Britishentrepotandexcluded the powerful Dutch carrying trade, as a consequence, nurturing London's commercial and bank capitalists. The Navigation Acts were a major tool in locking-in the colonial market to the British national economy,especiallytheBritishNorthAmericanmarket.Thiswas of special significance given the ten-fold increase in the North American between1700and1775 population and given the high wages currentin those colonies that generated a large effective demand for English mnanufactured goods [Wallerstein 1989:68, n 53]. As trade expanded the tax-base expanded, further strengtheningthe state. In the English case it particularly beniifitedthe state because trade was funneled through a few bottlenecks-the ports-where dutiescould be collected cheaply and efficiently. The opportunitiesfor this dependedon geography and thathad much to do with the longstanding relative efficiency of English administration. If trade, on the other hand, passed over a vast and often ill-defined frontier then duties were more difficult to collect. Furthermore, taxeson tradehadto if be taxes on internal trade, they have to be levied at artificialfrontiers,which aredifficult to police. Most states of Continental Europe, including France, faced this difficulty [flicks 1969: 82]. Then there were a series of otherprotectionistmeasures,such as the Acts of 1700 and 1721 thatprohibited the importationof printedcalicoes andcottons from India for domestic consumption. This system of industrial protection was furtherconsolidated by Walpole's custom reform of 1722 and the removal of export duties on agricultural and manufactured goods in 1699 and 1722 respectively [Minchinton1969:13].Thesemeasureswere supplementedby the much largereffort in the 15 years after the accession of William III to the English thronewhen "the English tariffstructure transformed was from a generally low-level, fiscal system into a moderately high-level system, which, thoughstill fiscal in its purposes, had become in practiceprotective" [Davis 1966:307].With the, navy, the merchant marine and domestic industry nurturedin these ways English navalpower becameascendent.Thatin turn helped in the acquisitionof markets,supply sources and monopolies in a virtuousmercantilist cycle."8 Next came the wars and the resultant peace treaties. As mentioned above, the conclusion of theMethuenTreatywith Por-

tugal in 1703 provided a stimulus to trade and helped in time to make London a major market in bullion, so crucial for pre-eminence in an age of metallic currency [Wallerstein 1980:191-93; Minchinton 1969:155ffl]ThenwiththeTreatyof Utrecht, that ended the War of Spanish Succession (1702-13), England enlarged her American holdings at the expense of Francewho gave up herclaims to the Hudson's Bay region, to Newfoundland,to St Christopherandceded Acadia. These gains opened the way tc westwardexpansion andthe growing population of the North Americancolonies cultivatedmore landwhich eventually expanded exports of tobacco, rice, and indigo to England and wheat, beef, pork, livestock and lumberto theWestIndies [Wallerstein1980: 255; Minchinton 1969:14]. From Spain, Englandwon Gibralter theAsientowhich and gave English and colonial slave traders a crucial monopoly in the supply of African slaves, the most strategic resource of the Atlantic trade,"9 the Spanisb American to colonies. With the Treaty of Paris, which brought the Seven Years War to an end, Englandgained Canada,CapeBretonIsland and all the region east of the Mississippi. Florida was taken from Spain and most of the French colonies in India, Senegal 'and Goree in West Africa were also acquired. The annexation of Tobago, Dominica, Grenadaand St Vincent in the West Indies was followed by the Free Port Act of 1766 by which the English state endeavoured to capture trade with the Spanish American empire [Minchinton 1969:17]. Along with the defeat of the Dutch on the Atlantic came their defeat on the Indian Ocean. Throughmuch of the first half of the 17thcenturythe EIC appearedto be fighting a losing battle with the VOC as the early Dutch monopoly of the Moluccan Islands andthe seizureof Batavia in 1619 forced the EIC into concentrating on Indian textiles (that nonetheless proved to have a farmore elastic market in .Europe to the later advantage of the English). The upward trend of the EIC began to take hold only from 1661, though momentarily hampered by the Second and ThirdAnglo-Dutch warsof 1665-67 and 1672-74. The personal union of Englandand the Netherlandsthroughthe Glorious Revolution was a blessing for the EIC as it attenuatedAnglo-Dutch hostility. Next, came the creation of the British home market, that, in the first instance, received a fillip from the Act of Union with Scotlandin 1707 thatrealigned the Scottish economy away from the Dutch and into the British Isles-a fact made evident by the withering theScottishStapleatCampveere of in Zeeland [Lenman1990:48-54; Davidson and Gray 1909: Chapter6]. Theni,an intricate regional division of labour and the internalisation of production costs by enterprises, in the course of the "Industrial

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Revoluticon",dramaticallytransformedthe trade, regimeof productionanid internation.al with GreatBritain relocated at the contreof the new regime of accumulation as the "workshopof the world" importingagriculturalsupplies andraw materials (grain,cotton, sugar) and exporting manufactured goods and machinery (cotton textiles, metalware, textile machinery, and railways).20Then, new sources of supply and expansion into new markets for textiles, textile machinery, coal, and railroads,generatedan increasingvelocity of tradetill the 1870s that became the motto of the British [Milward and Saul regime of accMmulation 1977:471]. Theresults of this reconfigurationof trade andthe new internationaldivision of labour were evident in the volume, value anddirection of trade flows. Through much of the 17th and 18th centuries the traditionaltraffic in English woollen cloth continued to play an importantrole but the newer trades proved to be more consequential in transforming the trading system as a whole and for later British hegemony. With growing extra-Europeantrade and increasing volume of re-exports,English ports,especially London, became frt an entrepotas well as a terminalandthen a 'global city' providing inlormation, management, and finances, espocially financial management services, for the circuits of the capitalist worldeconomy. Themostrapidly expandingtrade was not in the indigenous manufacturesof Englandbutin the re-exportof commodities broughtfrom overseas as a consequence of the widening areaof English overseas trade. Of these East Indian products-calicoes, saltpetre,indigo, silks and spices-tabacco fom Ambrica and Mediterraneancotton, dyestuffs andraw silk were the most important. The slave trade acquired increasing importancein the 18thcentury. "Before the Englishcivil war,re-exportswere trivial;by the 1760s they were making a notable addition to English native exports; by the end of the century they added to that total no less than50 per cent" [Davis 1969:111]. "Anned aggression was the heartof comof merce", argued,GeorgeClark,a historian the 17th century (1947: 59). We have seen how apt that characterisationwas for English successes in commerce in the west and in the east. We will now see how through nuch of the 17th and 18th centuries the same would hold for English pre-eminence in Europeitself. Intenseintra-European conflict characterisedthatepoch andtheBritisl came out on the top because of their geostrategic insularity that involved lower protection costs, and more importantly from our perspective, because they managed to mobilise the sums required for such extensive inter-state conflict without going bankrupt. As the geopolitical features are beyond the scope of thlispaper,

we confine ourselves here to a discussion of the financial aspects. Braudel agrees with Isaac de Pinto's assessment that the crucial English victory over the French in the Seven Year's War (1756-63) was a naturalconsequenceof the mobilisation of English resources through the nationaldebt, which in turnwas a product of the English 'financialrevolution'. In contrast,France,the other challcngerto the Dutchmantlewas disabledby its poorcredit arrangement [Braudel1984:378]. Theirony was that much of the capital mobilised by the English state and deployed to some extent against the United Provinces came from Dutchcapitalists.But Dutchcapitalists and neededsome guarantees restucturingof theEnglishfinancial systembeforetheycould invest in the English state wholeheartedly. The English'financial revolution'fulfilled that requirementand became a major tool, first, in the British challenge to l)utch dominance and then in holding on to her lead vis-a-v'is France. The Eniglishl/British financial revolution that was engineered between the 1660S and the 1720s 21 was the latest increase in scale for modern longterm debt, from Italian city-states to the province of Holland, than to the United Provinces, eventually to the UK. Like the Dutchm, the English financed their state building activity throughloans. In less than a century, between the Nine Year's War (1689-97) and the AmericanWur of Independence (1775-83), the public debt had increased 15-fold in current prices from ? 16.7 millionto ? 245 million.As aggregate borrowingincreased with eaclhsuccessive war, so the proportionof wartimeexpenditure funded by borrowingrose. Credit accounted for 31 per cent of spending during the War of Spanish Succession (1702-14) andby the time of the AmericanWar(177583) 40 per cent of the expenditure was fundedby loans. The state's dependenceon loans meant more tax revenue had to be spent to meet interestpayments.In no year after 1707 was less than30 per cent of state income required to service debts [Brewer 1989: 114-16, 119]. Following the Dutch lead Britishdebt-revenue ratiodramatically moved from0.8 in 1692 to 8.5 in 1720, 10.4 in 1750 to a peak of 18.4 in 1784 22 then decliningto 8.4 by 1811[Riley1980:116-17]. As mentioned before, in spite of all the innovations, the English financial revolution would have been a much muted affair without the interest of Dutch capitalists in English governmentsecurities. It was with the decline of Dutch monopoly over the Baltic trade, rising wages at home, and protectioncosts, thatwe witness a financial withdrawalof Dutchcapital in searchof an adequaterate of profit. At this time there was a generaltendencyof Dutchbusinesses to forsake the goods trade to specialise in finance (e g, the Hopes, the Pels, and the

Cliffords). Dutch capitalists' interest in Englislhgovernment securities was evidenlt fiom the million-pound English loan flotation in the Amsterdam market early oni inI 1692. Yet, the Dutch had generally refused to place their capital at the disposal of the Englishistate fundamentally because of inadequateor unsatisfactoryguarantees.Oncc theEnglishfinancialrevolutiontransformed that, the Dutch moved-in in a big way as English 'funds' afforded them convenienit inivestment, higherinterestrates,anda choice focus for speculation on the Amsterdam bourse [Braudel 1984:261]. The movement towards British investments peaked in the period between 1740 and 1780, when they investmentaftcr became the most importanit loans to Dutch corporatebodies.23 much So so that a speakerin the House of Commons in 1737 expressed worries aboutDutchcoIntrol of 1-ritish land mortgages [Wilson 1941:671.24 The British then used the plunder of India, in the decades after Plassey, to buy back the national debt from the Dutch. A debt of about? 25-30 million was rapidly liquidated in a few years.after 1783. In the years 1757-66 pureplunderreachedits peak andcontinuedat ahigh level until 1774 after which it becamedisguised more andmorein commercial forms. Estimates of the "drain of wealth" from India range from ? 100 million to ? 1,000 million for the halfcentury or so after 1757. Davis argues that "Indian wealth supplied the futids that brought [the] national debt back from the Dutch and others, first and temporarilyin the interval of peace between 1763 and 1774, andfinally after 1783, leaving Britain nearlyfreefromoverseasindebtednesswhen it came to face the great French wars from 1793" [Davis 1979:55-56,Wallerstein1989: 85, Carter 1953]. Thoughthe Englishchallenge to the Dutch hadbegun by the middle of the 17thcentury it was only after 1730 that the Dutch commercial system finally began to breakdown under the pressure of the English Navigation Acts. The terminalfinancial symrtptoms of the transition became visible only in a series of crises that hit Amsterdam in the years 1763, 1772-73, and 1780-83. While more andmore of the profitabletraderoutes were monopolised by English merchants, and British industrialists spearheaded the reorganisationof the internationaldivision of labour, and both reinvested their profits in expanding trading and production sysremainedthe greatestcentems, Amsterdam treof international finance. Amsterdamplutocrats financed much of these British activities. But Amsterdam could fulfil this demandonly withinlimits, afterwhich came the financial crises as Dutchpecuniarysupplies proved to be inadequate for the expanded world-system. The first crises, of 1763, was triggeredby the end of the Seven Years' War ( 1756-63). The war had

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necessiated an expansion in credit wlhiclh was said to be 'fifteen times greaterthanthe cash or real money in Holland',2 The bankruptcy of'the Neufvilles in August 1763, because of their inability to produce the six million florins they owed, touched off the collapse of a system already under.severe strain.Suddenlydiscounterscould no longer discount paper and the whole credit struc'turecame crumbling down, creating a currency shortagethatspreadfrom Amsterdam to Berlin, Hamburg, Altona, Bremen, Leipzig, Stockholm andLondon.In need of casb Dutch investors began to recall the capital they.had invested in English stocks the Stock Exchange.26 paralysing Amsterdam bankershad just Amsterdam's merchiant aboutre-emerged from the traumaof 1763 when the crisis of 1773 was triggeredby the of Clifford bankruptcy December 28, 1772. The bourse ground to a halt, bankruptcies spread, and the Bank of Amsterdam in association with leading businessmen advanced two million florins in cash to ease thepressure.Yet,Braudel(followingCharles wilson) argues that this crisis of 1773 was decisively different from the crisis of 1763 becausethe initial incidentoccurredin London not in Amsterdam.The collapse of the Cliffordswas linked to the difficulties of the EastIndiaCompanyin Bengal. The crisis in kondon was quickly broughtundercontrol by the interventionof the Bank of England which suspendeddiscounting of any doubtful bills and eventually of all paper. Amsterdamwas hit the hardest,as'the preeminent money and credit market was left by itself to back all the paperir circulation. In Amsterdam, for years confidence was never really restored among the merchant class. According to Braudel this was the crisis that showed that was ...Amsterdam no longer the centreor of Thishadalready epicentre Europe. shifted
to London. Can one suggest that a highlyconvenient rule might operate' in this context, to wit, that any city which is becoming orhas become the centre ofa world-economy, is the first place in which the seismic movements of the system show themselves, and subsequently the first to be truly cured of them? If so, it would shed a new light on Black Thursdayin Wall Street in 1929, which I am inclined to see as marking the beginninlg of New York's leadership of the world [Braudel 1984:272].27

Kindleberger argues that in the previous crisis of 1763 the Bank of England and London private bankers had come to the rescue of their Dutch correspondents by grantingcredits largerthanthosepreviously given in periods of prosperity.Seven consigiunents of gold were shipped in two months, and in addition, English banks delayed presentingbills for payment.Such aid was based on the Knowledge that British prosperity was intimately associated with

the flow of Dutclh capital into England. Yet in the crisis of 1773 the Bank of England dumped all the pressure of the crisis otn Amsterdam by refusing to discount paper (1989:203, 1978:183). Couldit be that1773 revealed the logic of all transitions where the old centrecan no longer rule the system while the new is unable, perhapsunwilling too, to do so? How then can we explain English aid to Amsterdamin 1763? Couldit be thatin 1763 Englishi merchanits could not afforda shakyAmsterdamfinancialmarket and they aided the Dutch from a position of relativesubordinations while theirrefusalto do so in 1773 was a signalof Englisharival? Amsterdam had ceased to be a world leader by the time of the thirdcrisis, in the 1780s. In associationwith thefourthAngloDutch war (1781-84) this crisis had a particularly devastating effect on Holland. Nominally, according to the Treaty of Versailles (September 3, 1783), the Dutch won that war, but they were financially exhaustedand it was Englandthatemerged theeconomic victor.The warcontributedto the collapse of the Amsterdamwisselbank, which hadadvancedfundsin theemergency to the city of Amsterdam,which in turn,had got involved in a futile attemptto rescue the terminallyill VOC. The VOC'neverrecovered nor did the wisselbank [Kindleberger, 1984:48]. To make matters worse, following closely on its heels were the 'Patriotic Revolution' and the successful "Orangist Counter-revolution"broughtabout by English money andPrussiantroopsin October 1787. The United Provinceswere caught in the power struggle between FranceandEngland and would witness another foreign invasion by Napoleonic Francein 1795 that can be considered to be the symbolic date whenall Dutchpretension greatnessended to [Braudel 1984:273-76]. Underpinningthe three episodes of tumult in the finatncial marketswas the evolving fiscal crisis of the Dutch state. The rate of increaseof protection costs faroutstripped revenues. The earlier withdrawalof Dutch capitalistsinto international finance hadthe effect of starving the United Provinces of taxrevenues.Simon Schamashows how the effects of this escalationof costs and shortfall inrevenuesshowedupin thedebtcharges of Holland. Its capital sum had risen from around150 million guildersin 1678 to over 400 million in 1713. But mid-century retrenchmenthad succeeded in confining interestchargesto below 15 million. By 1789,' however, extraordinary loans, 'dons gratuits', lotteries and levies had begun to take their toll and in 1791 interestreached the recordlevel of 18,276,015 guilders. On top of that, on the eve of the Batavian revolution in 1795, the debt of the now moribundVOC stood at 118 million guilders with yearly charges of around4 million. Interest rates whlichlthroughlout thle

century had remained around two-and-alhalfper cent began to increase at the end of 1780s when rates of 4-5 per cent became common. By 1794 the government was resorting to contracts with financiers at even 10 per cent and more (1975:110-11). The disruptionand expenses associated with the end-of-the-century wars and revolutions bankruptedthe Dutch state and destroyed the financial marketof Amsterdam and left London unchallengedin the sphereof internationialfinance (Schama 1975: 111). III Transition from British to American System (ca 1890-1945) Before we describe the transition from British to US hegemony we will. briefly sketch theessentials of the British system. It can be said in a highly condensed from that it was the successful creationof the national marketandthe deploymentof state strength, two mutually constitutive elements of the European world-economy in the 17th and 18th centuries, that were crucial in the duel for world domination. The constitution of the national market as a well integrated division of labour, as in the English case, broughta renewedsurgeof power to the new centre that the city-centred economies, like the Dutch, could not withstand [Braudel 1984: 297]. France failed to produce either a competitive enough state or a national market to challenge the Dutch and the English. Consequently, the English beat their Europeanrivals in the conquest of the markets of the New World;put their finances in order under Pitt's administration (wlhile Frenchfinances went into a tailspin with the American Revolutionary wars); defeated the tea smugglers in 1785; established a more efficient administration in India Through the East India Bill in 1784; and established the first settlement in Australia in 1789 [Braudel 1984:379-82]. Perhapsthe single most importantfactor that made the British financial regime so distinctive from the system that the Dutch dominated was the role of the empire, particularlyIndia. It is the far more successful combination of territorialism and capitalism, as analytically separate, logics, that distinguished the English from the Dutch and it was the prevalence of the capitalist logic in Europeandthe territorialistlogic in the east and the symbiosis between the two that made all the difference. If the empire was aequired in a fit of absent-mindednessit was nonetheless with great rationality that its fiscal assets were exploited to the financial advantageof London.28 Firstly,India'sforeigntradewas structured to realise a deficit with Britain but a large surpluswith therest of the world.That allowed GreatBritain to square its international settlementson currentaccount,which

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in turn, allowed it to use the income from overseas inyestment for furtherinvestment abroadand to give back to the international monetary system the liquidity it had absorbedas investment income. Furthermore, accordingto Lindert'scalculations, in 1913 Britishpossessions in Africa, Asia andAustralia held about $ 150 million deposited in London, of which $ 136.3 million belonged to the 'Government of India' (1969). By preventing India from transformingits annual surpluses into gold reserves the India Office contributedtowardskeeping British interest rates low. English banks were able to borrowfrom the IndiaOffice at 2 percent andreinvest on the London market at 3 per cent [de Cecco 1984:63]. Secondly, manipulation of India's metallic currency allowed the British monetary authorities a much larger room for manoeuvre. For instance, with the discovery of gold in South Africa in the 1890s the British government feared that the market might be glutted so the imperial governmentorderedthe minting of gold sovereigns in India but reversed the decision as soon as the Boer War put pressureon the gold supply.29Finally, and most importantly,theBritishRajengineered a reversal of the traditionalflow of bullion from the west to the east. As mentioned earliertributefromIndiaallowed theBritish to buy back their debt from the Dutch. The maincomponentof thisflow were the 'Home Charges': interest on debts to England incurred by the Raj to subjugate India; pensions of former civil servants living in England;paymentsto the WarOffice for the upkeep of the British-Indian Army and materials purchased in England on the Raj's account. The 'Herschell Committee' noted in 1893 that the main problemn the of 'Governmentof India' was that it had to remitlarge sums to Englandevery year that, for instance in 1873-74, amounted to ? 14,265,700 and had by 1892-93 increased to ? 26,478,415 [de Cecco 1984:63, 65]. The surplus which that tribute made possible freed the city's earnings for further commercial and financial transactions.3o The Raj played a crucial role in the international financial system of the 19th century but there were other British developments thatthoughsubsidiarywere nonetheless important.First, similar to Amsterdam, London's control over world liquidity began with South American precious metal. Because of a combination of gold finds in Portuguese colonies (Minas Gerais in Brazil in the 1690s) and the constructionof English-Portuguese trade that showed an increasingEnglishsurplus,3" Englanddominatedgold importsthroughthe 18th century amountingto about 10 millionirix-dollarsa year in the first half of the century.32 Yet, at tileheightofB]3ritish hegemony, paperbegan to replace precious metals as tile increasingly acceptable store of value and the Brit-

islhdominated the system of issuing bank niotesfrom the very first. In the issuing of bank notes Great Britain became the most proficient,making the Britishmonetaryregime somewhat different from the Dutch regime of finance. By 1698 the Bank of Englandhadnotes in circulationpayableon demand worth ? 1,340,000. By 1720 this total had risen to ? 2,480,000 (smallest denomination? 10). Manyprovincialbanks in England and Scotland issued their own notes too. In all, it is estimated by Parker, thatthe total value of papercreditscirculating in early 18thcenturyEnglandwas about ? 15,000,000 as against a total coin and bullion stock of ? 12,000,000. The financial innovations of the later 17th century had expanded England's total monetary stock by 25 per cent without an equivalent increase in the amountof bullion . No other Europeancountryat that time managed to create money on this scale in this way [Parker1974:552]. It was not only a matter of creatingpapermoney,butalso of managing its creationin a mannerthatwould keep the pound-sterlingstable. Tle British banktookcareof boththese aspects: ing structure creating money throughcountrybanks and the Bank of England and controlling it throughthe sterling-gold standard. The British were also the first to establislh a national banking network. Within a decade of the legislation of 1833 (thatexplicitly allowed joint-stock banks in London) about150 bankshadbeenestablishedwhich witli their branches accounted for almost 600 bankoffices [Cameron1982:104].3 In 1865, Walter Bagehot testified before the FrenchInquiryinto the Principles thatGovern Monetary Circulation,thatthe banking system of England was superiorto that of Francein transfeiTirig savings from households to industry,since each village in England had at least two banks, "thanks to whichno shilling of savings was lost" [cited in Kindleberger1984: 87-88]. Larger networksandlargerassets meantgreaterstability. In addition,the growthof Britishdeposit banks placed at the city's disposal a lhuge quantity of funds which could be used to finance world-wide trade. The central principle behind the smooth functioningof the British financial system was a stablebankingnetworkthatmobilised vast amounts of capital and the Bank of England's monopolistic control over the reservesof the system thatensuredconvertibility at all times. The Bank of England's controlover thedomesticmoney supplyanid sterling's worldrole were madepossible by the centralisationof the domestic banking andmonetarysystem undertlhe monopolistic control of the Bank of Elngland(as envisaged by Peel's BanikAct of 1844).? IlTecity's interestin free tradeandconvertibility, the Treasury'sattemptsto maintain a tightly balancedbudget thatkept the state

solvent, and the Bank of England's control over the reservesof the national andinternational system, made it possible to establish the distinctive institutionalnexus of British financialhegemony:theCity-Treas ury-Bank of England nexus [Ingham 1984]. If the nexus of the City-Treasury-Bank of England was the institutional site of governance of the internationalsystem, international financiers like the Rothschilds were the sinews of the British system connecting the world through sterling loans." They were the most importaht agents that marketed public loans in the London money market. Government patronage and an allEuropeannetwork, that provided both connections and information, was what gave the Rothschilds the decisive edse. The Rothschilds were part of a largercircle of merchant bankers who had jumped on the boat of British industrial expansion only to emerge by themid-19th centuryas the 'central bankers' of Imperial Britain by pulling out when profits were still high [Arrighi 1990:86; Chapman 1977]. The importance of the Rothschilds, among other merchantbankers, for the British regime of finance can be gauged from Hobson's comment: These greatbusinesses-banking, broking, bill discounting, loan floating, company promoting-form the central ganglion of internationalcapitalism... No great quick directionof capitalis possible save by their and theiragency. 15oesany conisent through one seriouslysupposethata greatwarcould be undertaken any Europeanstate, or a by greatStateloan subscribed, the house of if Rothschild its connectionsset theirface and againstit? [Hobson1938:56-57]. The protection and preferential treatment whichi the Rothschild financial network received from Imperial Britain had its counterpart in the incorporation of that network in the apparatusof world rule deployed by ImperialBritain. "Pax Britannica held its sway sometimes by the ominous poise of heavy ship's cannon, but more frequentlyit prevailed by the timely pull of a threadin the internationalmonetary network" [Polanyi 1957:14]. To reiterate:till the 1880s London operated unchallengedin the internationalfield. Sterling's stability had been maintainedby government directives to the Bank of England, and it had prevailed over all other currencies as the most stable and efficient vehicle of trade, attractingmore and more capitalto itself. TheLondonacceptinghouses had assembled unique experience in assaying commercial paper from all over the world. Tle growth of British deposit banks andthe stability of the sterling, placed at the city's disposal a huge quantity of funds which could be used to finance wvorld-wide trade.'Thepolitically servile reserves of the Indian monetary system provided a large which British monma.sse de mnanoeuvre

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etary authority used to supplement their own reserves and to keep London at the centreof the internationalmonetarysystem. From 1890s onwards, as trade, production and profits shifted to non-British hands. especially Germanand American,financial centres emerged that challenged London's centrality. From the Barings Crisis in 1890( it was evident that the internationalfinancial system was catching up with the competitiveness and resultant restructuring that was developing in the worldof productionand commerce since the 1870s. As the sterlinggold standardbecame an internationalgold standard,Paris, Berlinr,and New York developed finanicialinstitutions that came to threatenLondon's monopoly. As the political climate deterioratedwith the collapse of the Continental. balance-of-power, what ch'angedwas London's capacity to be the repositoryof the world's ultimategold stock. Paris and Berlin no longer considered the of departure theirgold reserves (so essential for the working of the gold standard)with equanimity.But it was the behaviourof the American Treasury with the size of the Americanmarketbehindit, thatwas crucial for the demise of the gold standard. US bankersused the Londonmoney market as its centralbank, as it did not have one of its own until 1913. London thus had to absorb all the seasonal oscillations in the American demand for money. The US on top of that, unlike the politically pliant 'India Account' absorbedhuge amountsof gold, keeping with the resurgentprotectionism in the worldeconomy. The US Treasury being the principal glutton along with, the nationalbanks, and the farmers.In 1889 the combined gold reserves of the US Treasury andthe nationalbanks grew to ? 81m out of a total world official reserves of ? 296m; in 1899 they stood at ? 124m out of ? 504m; and in 1910 they totalled ? 273m out of ? 867m. The reserves of the three centrecountriescombined-Great Britain, France and Germany-were worth no more than those of the US alone. The Bank of England was left to control the London money market with a puny average gold reserve of only about ? 30m. That too in a system in which the gold recyclinig mechanism, which worked well as far as the colonial territories like India were concerned, was only partially effective where independent primaryexporters such as the US was involved [de Cecco 1984:120,125]. ' Troubles in the financial system were reflections of the changing configurationof the tradenetwork. The smooth functioning of the sterling-goldstandardwas depenidenit on British industrial supremacy and trade surpluses,both of which were compromised Germany. by the relative rise of the US anid eroded the Then the first world war furthler centralityof the British economy. First, thle

decreasing it kept its -extensive financial networksandits role as an important(if not the) internationalfinancial centre after the first world war. Moreover, in spite.of the emergence of the dollar -and, to a lesser extent, the franc as competitors, sterling maintained its role as the world's leading currency. Pound-sterling reached the peak. of its importance between 1860 and 1914, when about 60 per cent of world trade was invoiced andsettled in sterling. The descent from that peak wag gradualand slow and as late as the early post-second world war years, the pound was still the world's most important transactions and quotation currency, accounting for perhaps half of all trade [Cohen 1971.71-72; Brown 1940:143,145]. Yet, things were begipning to change for the worse for the British currency. In the panic of 1907, US bankersrealised that the weight of the American economy had become 'too big' for Europe to underwrite in times of crises. After years of bitter debate president Woodrow Wilson signed the Federal Reserve Act on December 23, 1913. This provided a rediscountmarketfor dollar bills of exchange that intreased the use of dollar as a-meansof exchange andas a means of payment in internatitnal trade and encouragedAmerican banks to participate in international banking business [Abrahams 1967:10-11,50-51]. After the outbieakof the first world war, "the Federal Reserve Board furtherincreased the use of dollar exchange in 1916 by btaining from the Congress an amendmentto the Federal Reserve Act that allowed American banks to accept bills of exchange in dollars that were used to finance tradebetween nations Regulatory measures and exchange controls altered the parameters of banking as it had other than the US. This facilitated the reexisted before 1914. Competitive pressures placement of sterling with dollars as the medium of exchange between South increased in many places. In some cases, such as Iranandd Americaand Europe.As a result, shipments Australia,state-owned institutions combined central and commercial of merchandisefrom Holland to Argentina, banking, to the chagrin and dismay of the for example, and of coffee from Brazil to British banks. These changed conditions Italy, were financed in dollors. By the end of meant that barriersto entry began to rise for 1916, New York banks had acceptance liBritish institutions, but decline for those of abilitiesintheneighbourhood 150imillion; of$ other countries... The changes in industry allof America'sbankLs between$'200and held structure worked almost uniformly in the $ 250 million" [Abrahams 1967:53-54]. direction of reducing the competitive advanAs mentioned before, the strengthening tages that-British banks enjoyed and develof theUS financialpowercame mainly from oped priorto the First World War.In the area its huge tradesurplus.As a resultthe Ameriof cost, dollars began to rival sterling in the can gold stock tripled between 1914 and settlenment international transactions, esof pecially in some areas of Latin Anmerica. 1930 (continuing an earlier trenddiscussed before) and American gross external assets Exchange controls, and other problems quadrupled,far outgrowing foreign claims greatly curtailedthe floating of foreign loans on the London market.New local institutions on the US. In terms of comparative capital competed vigorously fordeposits. Bank Misr flows, "from 1924-29, the US loanedabroad some $ 6,400 millions and the UK $ 3,300 in Egypt and Bank Melli in Iran were two examples in the Middle East. The ability to millions" [Kindleberger1973:56]. Theoutmoe fundsbetween countries was disrupted flow of capital from New York, which by exchange controls and exchange instawere accelerated by the Dawess Plan in bility (1990:43). 1924, had surpassed those from London in Nonetheless, it must be pcinted out that the 1920s[Dr ond 1987:36;Kindleberger even thoughB3ritain's economic power was 1973:38-39,54] . warv weakened the trade balance of European powers, particularlyBritain. On the one hand British exports decreased as a result of the diversion of resources for the war effort, and on the other Great Britain had to increase its imports of war related products,especially from the US, which in turnstimulatedAmerican heavyindustries.37 The immediateconsequenceof the increase in inlportsand decrease in exports was that Great Britain generated a huge trade deficit"38These factors acting togethercontributed to the collapse of the sterling-gold in standard March1919 whenthepoundwas officially devalued. Repeated but unsuccessful attemptsby the British state to reestablish the dominanceof its own currency followed. Second, the warstrengthenedthe financialpower of the US while weakening Great Britain's. Since the first world war was mainly a Europeanwar, the American business environment could avoid disturbance. In fact, the war made the US a net creditorin relationto the rest of the world.39 During and after the first world war the US became theprincipalsupplierfor new international capital flows.40 The trendof relative British decline continuedthroughthe inter-war years. Relative to other great powers, "the 1920s were, except for 1929, a lost decadefor the United Kingdom" [Kindleberger 1973:58]. With increasingindustrialself-sufficiency of the US and the reconfiguration of trade the British hadcome to dependmore andmore on their financial services to retain their edge. Here too British transnationalbanks and financiers were soon faced with a changed world. As Geoffrey Jones put it:

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The late-1920s and the early-1930s were characterised by unprecedenitedfinancial instabilities. As instability spread througl the system, a speculative boom took lholdin its the New York stock marketanid collapse was one of the most memorable and dramatic expressions of the crisis of the interwar years. The stock market bubble was of formedduringtheper-iod sustainedgrowtlh of the 1920s. The engine for prosperity of the 1920s was the emergence of large-scale commercial and industrial enterprises that took advantage of new continuous process teclhnologiesand more efficient vertical integration[White 1990: 146]. Thlefinancing needs of these new industrialand commercial enterprisesalteredthe face of American capital markets. These firms rapidly came to dominate the equities market. Betweeni September 1916 and September 1928 many of these companies like Allied Clhemical, American Locomotive, AT and T, AmericanTobacco, International-larvester,Mack Trucks,Sears Roebuck,WesternUnion and Woolwortlhwere addedto tlle list of companies whose shareswere tradedon theNYSE. These large firms prefelred to raise funds out of retained earnitngsand new stock isbank loans. This sues ratlherthatnthirouglh left commercial banksin a quandryanid they startedlooking for new sources of income. Commercial banks could not directly trade in secur-ities,helce, to circumventthe legal restriction they set up whlolly-ownedsecuenteredinvestmenit bankrityaffiliateswhiclh someing andbrokeragebusiness. Clharginig ter times one quar of the New York brokerage commission these commercial banks developed a large new pool of potential clients in their depositors. A large number of small investors were drawninto the market first thiouglhinvestment trustsset up by these bankstlh hadfixed por-tfolios at (lar-gely blue chip) and tlhenthlrough trusts manlaged that played the matket more ambitiously. The influx of many new people and the excitemnenit about the potenitialitiesof new ial manager styles and organisations (foi instance GM) and new techniologies (for instance RCA) made it difficult to evaluate marketfundamentals.Old information and conitrolsystems proved to be inaidequate. Bankers got 'pulled' directly initothe market for slhort-term call-money loanisand this expansion of credit encouragedinvestors to become dangerously leveraged. By 1928 the marketbegan to take a speculative turn. As competitioniincreased in the teal sector-s of trade anidproductiotn investors beganl to concentratemore atndmore on speculative profits that were to be had in the NYSE, furtlher starving the real sectors of itnvestments. The inevitable crashifollowed triggering the Great Depressioni [Wlhite 1988]. 1990:Galbraithl The internlational of dlebtCriSiS thle1930(s was anlother of chlaos.. expressionl thefinanlcial

Yet, the post-war gold standardnot only failed to provide stability, but caused furtlier trouble. The first problem of the interowed the first phase whichi covered the enitireyear of 1931 and extended to the war fixed exchange rate system was that it following years. On the first day of 1931 was a 'gold exchange standard'insteadof a Bolivia beganto defaulton its dollarobliga- sterling-gold standard. The weakness withina shorttime its LatinAmeri- stemmed fiom its attempt to economise on tions ancl can neighbours followed [Fishllow 4986: the use of gold (something necessary given 82]. In the second stage thedefaultspreadto the limits of gold supply) by enabling counand soutlhern eastern Europe from 1932 to tries to lholda portion of their reserves in the middle of 1933. Finally, the thirdstage foreigniexchange. Since the supply of new was dominated by the Germandefault that gold was relatively inelastic, the incremen: coincided with the MonetaryandEconomic tal liquidity of the expanding international of anid Conferenice 1933 [Eichetigreeti Plortes economy took thieform predominantly of sterling and/or dollar. Otnce the stock of 1990:74]. Thie collapse of theNYSE anid initerna- sterlinig or dollar claims held by foreign the banks approachedthe value of Brittionial debt crisis sent a wave of batnkrupt- cenitiral cies through the banking structure. Carlos islhand/or the US gold reserves, the British Mariclhal describes the unfolding bankinig and/or the US commitment to peg the sterling and/orthe dollar price of gold would no crisis succinctly: longer be credible. The first signs of a weakening of the banking system came from the US as a run on banks The existence of two reserve currencies, in the south-east almost provoked a national enhancedthe ease with sterlingand doLLar, panic in mid-1930. The weakest link of the which central banks could shift between international financial structure, however, themi.Since the US gold stock was suffiwas not in the US but in Europe. 'rhe crisis. cientlylargerelativeto foreignclaims,once explodedinMay 1931, when the great Creditthe suspensionof convertibilityby Austria Anstalt bank of Vienna collapsed. The run andGennanyin the summerof 1931 drove then shifted to Germany and provoked the home the riskiness of exchange reserves, fall of the even larger Danatbank. By late central banksandothersbeganto shiftoutof July the London money markethad begun to sterling, the weakest reserve currency. crack under the strain, and on September 21 Britain'sforced devaluationin September Britain went off the gold standard. Another 1931 then shiftedpressuretowardsthe doltwenty-one countries followed. the British lar. The fed responded tighteningcredit, by examiple,and exchange controls were estabwhichintensified pressure foreigncentral on lished by governments of thirty-one nations banks... [Eichengreen 1992:385]. The debt crisis unfolded in thlreestages. It was LatinAmericani defaults thatovershadatround world [Marichal 1989:209].41 the The period between 1914 and 1925 was also marked by large exchange rate fluctuations. Consequently, Chur-chill, under influence of thiecity and with thie interest of Londoni in minid, decided to return to the Gold Standclardat par in 1925. It was no surprise that thie city of Lonidoniwas interested in 1restoring its pre-war positionl as a world financial centre. Nyur was it surprising tllat many leading European businesses backed thie return to gold because they were interested in exchanige rate stabilisation. Hlowever, at fir st siglht it is a little surprising that the US put conitnluous pressure for ster-linlg's return to gold. Kindlcbcrger argues: Not only Benjamiiin Strong, the Governor of the Federal Bank of New York, bLut Secretary Mellon, and a host of other Federal Reserve officials, were unhesitating in informing Nonnan in Decemiiber 1924 andJanuary1925 that the time had comie.Syrong's views were partly based on world considerations: the need to eliminate the malign effects of disturbed foreien exchange markets on world trade: and parlly on two national grounds: the hope (a) of reversing the flow of gold to the US, and (lb) of gaining international lcnding business for New York as a consequence of higher interest rates in London ( 1973 :47-4 8).

In much of the literature,the gold standard is portrayedas synonymous with financial in stability. HIowever, the 1930s, the opposite was true(ibid:394). "Between 1918 and 1925 people hadtoo often said thatLondon's financial strength before 1914 was due to the gold standard.The truthwas ratherthat the strengthof thiegold standardwas due to Londoni'sinternationalfiniancialposition" [Sayers 1990:295; also see Fearon1979:22]. Telescoped between 1925 and 1933 were a series of crises in the exclhangerate mechanism, the securities market,the debtmarket, and thiebaiiking network that destroyed all semblance of order in the internationalfinanicialsystem. The extraordinarytroubles of the interwaryearswere rooted in the fact thatin spite of its economic pre-eminence and trade surplusesthe IJSfinancierseitherrefusedto or could not replace the British in supporting the systemic needs of the new world economy.42 Certaini American actions furtlheraggravated the situatioin. First, the passage of the Hawley-Smoot tariff in 1930 indicating .a new wave of protectionism in the US,43 further destabilised the equilibrium of the world economy. Before 1914 unilateral Britislh free trade had provided debtor countries a certain market for tleir themoppottuexport.sanldhlenceprovided

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nities of earning foreign exchange for servicing their debt. However, the American refusal to do-the same meant that the world market was no longer stable since neither Britain nor Francewere able to do so. With worldcountheUS protectionindebtedtlhird tries, especially of Latin America, found it more difficult to earn foreign exchange that had already become difficult with the decline in prices of major primary products throughthe late 1920s. Second, the mohmentaryreductionin capital export from the US in the late-1920s also contributed to thie collapse of the world economy." This was so because once the generation of export surplusesby the weakereconomies (ie, debtors) was blocked by protection, the only other route left for global equilibrium was continuing capital exports so as to provide the foreign exchange necessary to service outstanding debts and finance deficits [Fishlow 1986:79; Kindleberger 1973:130]. The reason for the momentaryreductionin Americancapital outflow was mainly internal. Due to the speculative surge in stock market in the second half of the 1920s, investors turnedto the domestic stock market thus crowding out foreign issues [Kindleberger1973: 124-25]. "The mounting boom on Wall Streetdiverted American fundsfrom foreign to domestic uses andlike a powerful suction pump siphoned off liquidity from the rest of the world... Net short- andlong-term foreign lending by the US had exceeded $ 1,000 million in 1927 andreached nearly $ 700 million in 1928... In 1929 net short- and long-term lending by the US turnednegative, and the $ 800 million bill [of debt service paymentson dollar Iebts] came due" [Eichengreenand Portes 1990:75-76]. The next external shock to the indebtedregions came in termof anincrease in real interestrates thatgot underwaysince the Spring of 1928 and by late-1929 shortterm real interest rates had risen to more than 15 per cent [Eichengreen and Portes 1986: 612]. Protectionof the domestic market, speculation on the NYSE, and rising interestratesmadethe debt crisis inevitable. Apart from these destabilising measures the US government further added to the disturbances in the world economy by its refusal to write-off war debts. For Britaini, France, Italy, and Belgium, reparations and war debts could not be treated separately. They were willing to exchange German reparations for their war debts owed to the US. However, US financiers refused to accept reparations from Germany and to cancel war dents owned by other Europeancountries. Although eventual American settlements were made withi 13 countries on February 1922 it did not avertacontinuing need for EuropeancouItries to send significant payments to thle US [Fishlow 1986: 71; Kindleberger 1973:4 1].

IV Present Transition from BrettonWoods System

The first attemptat creatinga new regime of came with the establislhment the Bretton Woods System in July 1944. Under the Bretton Woods agreement, the gold standard was replaced by a system of pegged exchange rates. Countrieswere allowed to change the exchange rate of their currency only withl certainrange,when cases of 'fundamental' disequilibrium appears in their balance-of-paymentsaccounts.Each nmajor country would maintain the exchange-rate of its currencyeither by interveningin exchange marketsto keep its currencywithin a range of 1 per cent above or below its par value or by exchangingits currencyfor gold at a fixed exchange rate. The American FederalReserve volunteeredto buy andsell gold at the rate of $ 35 an ounce so as to maintainthe stabilityof thedollarandtransformed the new regime into a dollar-gold standard[Gowa 1983:35]. Moreover, two fundamental institutionsof the new internationalfinancialregime, namely,theInternational MonetaryFund(IMF) andthe World Bank (WB), were formed. The former was mainly established for exchange-rate stabilisation and maintaining international financial discipline, while the latter aimed at 'rebuilding'the economies of the underdeveloped countries. But, the BrettonWoods system grew too slowly to solve the immediate European post-wareconomicproblems.It was against this background the US, first, proposed that the British Loan (1945), and then the MarshallPlan(1948). Severalyears inltothe Marshall Plan the dollar gap was still a major problem and most European trade continued to be organised along bilateral lines, and no majorEuropeancurrencywas yet convertible [Block 1977:109]. The dollar gap persistedbecause US privateinvestment failed to take hold in Europein the 10 years afterthe second worldwar.Barriersto profit repatriation due to foreign exchange controls seemed to be the main problem [Frieden1987:76]. The rearmament policy, initiatedsince theearly 1950s, finallysolved this problem by pumping in millions of dollars into Europe. Supplementing military aid, the stationingof large numbersof Americantroopsin Europe greatlyincreased the dollars earned by Europeancountries. the Furthermore, prosecutionof the Korean war and the establishmentof a networkof military bases around the globe also increased the flow of dollars into foreigni lhanids. The outflow of dollars for direct of military expendituresin the US balatnce payments increased from $ 576 million in 1949 to $ 2,615 million in 1953 reaclhing a pzeakof $ 3,435 million in 1958 [B3loek 1977:115]. 'tile Korean war was in many

ways Japan'sMarshallPlanandsoon enough the European and East Asian economies recovered. Like the other two hegemons before it the US government in expanding the world-economy had underminedits own relative power in the long-run. In line with historical precedentsthe very expansion of the system since the 1960s became a source of instability for it. Just as Britisli Free Trade and investment in railroads all across the globe had broughthome huge profitsandexpandedcommodification, yet encouraged competitiveindustrialisation, US businesses did very well underUS lhegemony but so did the economies of Europe andEast Asia. They in turneventually posed challenges to US hegemony. The Eurodollar market played a particularlyimportant role in the latest financial expansion. Its market gained momentum in the second half of the 1960s afterthe expansionof west Europeansubsidiaries of US TNCs.45 Much of the profits of these subsidiaries were reinvested in western Europe which contributedcrucially to the rapid development of the Eurodollarmarket. One of the most importantcharacteristicsof the Eurodollar marketwas its unregulatednature.It was an off-shore marketwhich neither the country of origin (US fbr instance) nor the host country (UK) controls. That helped it to become more competitive than the domestic financialmarkets.Eurodollar bankscould offer riigherinterest rates to depositors and lower interest rates to borrowerssince they were not subject to restrictive reserve requirements.US capital was thus attractedto the Eurodollarmarket.Thatput pressureon the already worsening balance-of-payment situationin the US. Fromthe mid-1960s, the US governmentattemptedto control capital outflows. However, despite controls that lasted until 1974, American TNCs which were increasingly financed out of borrowings abroadand profits did not stop investing overseas. Even worse, these restrictions speeded the outflow of American capital by pushing American banks into the unregulated Euromarkets. "By 1970, the Euromarkets' net size (that is, substracting transactions among banks themselves) was $ 65 billion, and three years later it reached $ 160 billion" [Frieden 1987:85].46 This outflow of capital put pressure on the Bretton Woods pegged exchange rate mechanism as the over supply of dollars in Europe put downward pressure on ts exchange rate vis-avis European currencies that eventually led to the closing of the 'gold window' in 1971 as American gold reserves were running out. Involvement in thieVietnam war further worsened the balance of payment deficit of the US.47 The fixed exchange rate system completely collapsed in 1973 andit was noC)W to themarketto deterleft mine the value of currencies.

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An importantramificationof the unregulated Eurodollarmarket was to generate a deregulation market force, pushing other financial centres to offer similar facilities and freedom to banks and operators. trendin US domesticpolicyThe dominant the Presimaking through pastdecadeunder as dentsFordand Carter, well as President Reagan,hasbeentoward deregulation... [for instance]ceilings on deposits left for less than six months were lifted in 1970;.and ceilings on demanddeposits were lifted in November 1978. In 1980, the process of was deregulation greatlyspeededup by the Depository InstitutionsDeregulationand MonetaryControlAct which will resultin of the totalelimination all controlsby 1986 [Strange1986:52]. Even in Japan,the least susceptible country to foreignpenetration,deregulationhasbeen In gaining momentum.48 addition, the two majorAsian financial marketsin Singapore and Hong Kong also reduced taxes and relaxed the regulations pertaining to bank deposits and loan activities. Even Taiwan andSouth Korea,which arefamous for their tightcontrolsover the financial sector by the state, are also liberalising their banking system. Financialinnovationshave also keptmuch of the financial marketout of the regulatory reach of the old institutions of control. For instance, the development of non-banksas competitivesubstitutesforbankingservices, such as money-marketmutual funds, credit cards, and smart-cardshave undercutregular bankingservices because the non-banks are less tightly regulated, particularly in terms of the amount of capital they are requiredto keep as reserve. Effectively raising the relative cost of capital for banksand at the same time thinningthe liquidity cushion of the whole system. It is not only the creationof new forms of money butalso the electronification and globalisation that has kept much of the financial maiket of the 1980s and 1990s out of the regulatoryreaclh of states. Finally, newer centres have emerged and/or some older centres have increased their relative power such as the Tokyo-Singapore-HongKong web that are not amenable to American control. We have seen that in the past when the system expanded to include new actors and new sites of capital accumulation, old regimes andinstitutionsof governanceturned out to be inadequate.The present transition is reminiscent of the period in the 18th cmtury when the entry of Brazilianigold underEnglish control (since the 1690s), the explosion in share capital (especially the birthof theLondonstock exchange), andthe entryof the British nationalmarket,witlhits into internationaltradeanid papercurTency, financial networks expandedthesystem and yet destabilised it. The Amsterdam wisselbank and the Amsterdam stock ex-

chanigeproved to be inadequatein governing the system. Institutions grounded on British soil like the branchbankingnetwork that mobilised a large new mass of money capital in paper currency and the Bank of Englandthat operatedthe gold standardso as to maintain the stability of this paper currencytookover the role of establishinga new international regime. By the end of the 19thcenturywiththerealinternationalisation of the gold standard and the competitive industrialisation the US andGermanythe of international traderegime underpinning the 19th century financial system was undermined and the Bank of England could no longer play the role of the international monitor. Important centralbanksin a more deeply institutionalised and statist system had to be led by the AmericaniFederal Reserve throughthe crisis of the inter-war years to establish the Bretton Woods arrangementthat saw the birthof multilateral institutionsof control such as the IMF, and the WB. Similarly, the expansion of the Eurodollarand the East-Asian market has thrown the old regime into disarray. Unregulated non-banks and the linking of financial centres (New York and Chicago in the US; London, Frapkfurt and Paris in Europe;Tokyo, Singaporeand Hong Kong in Asia) through fibre optic cables, has turnledthe internationial finanicial system into a 'global casino'. 9 Thne presentfinancialexpansion,like otlhers precedingit, is happeningmainly due to stagnation,or even declining prosperity,in the real economic sectors after 1968.50 The profitrateof manufacturing business in and the seven most advanced capitalist countries (US, Japan, FRG, France, UK, Italy, andCanada)in 1973 was only 80 per cent of the peak year of the 1960-73 period [Itolh 1990:52;Glyn etal 1990:77]. As aresult we have today the most unfetteredspeculation seen in the US since 1929. One simple indicatorof this is thejump in the average numberof slhares stock tradeddaily on the of NYSE, from 19 million in 1975 to over 200 million today. Even more striking is the expansionin the tradingin futurescontracts that grew from 3.9 million in 1960 to 11.2 milLionin 1970, to over 92 million in 1980 reachingover 220 million in 1987! [Sweezy and Magdoff 1988:21]. This kind of financial expansionhasgeneratedaninstitutional overload for the old system of regulation whiclh has for all intents and purposes crumbled.Everywlhere de-regulatedglobal maarkets gettingoutof controlof even the are major states. Transitionis characterisedfirst by unlare regulatedcredit expansionifollowed by retrenchmenit bringsin its wake bankr that uptcies, runs on banks, debt crisis, and stock market collapse. Falling interest rates throughoutthe 18thcenturyended withlthe late-l8thl century retrenchmentsthat kept

interestrateshiglhfor a long time, especially in Amsterdam.Similarly, the manias of the late-19th and early-20th centuries ended in inevitable panics before a new regime was put in place under American dispension. In the present transition we have already witnessed the souring of speculative manias of the 1980s with the new internationaldebt crisis, collapst of the real estate marketand the resultantS and L crisis, andBlack Monday alongside the widening American budget deficit that is putting additionalupward pressure on long-term interest rates. Systemic chaos characterises the terminal phase of the transition. Systemic chaos is bornout of the fact that duringtransitions there are at least two non-congruenttrajectories: one of the rising hegemony and the other of the declining power. While. hegemony is a delicate balance between competition (inter-firm and interstate) and order, transitionsare marked by the tipping of the balance towards the pole of intensifying competition. Competition leads to instability and financial instability expresses itself in exchange rate fluctuations, banking crisis, debt crisis, etc, thatencourages speculation as well as shorten the time horizon of capitalists and states alike. Hegemonic regimes degenerateinto systems of puredomination where the strongest capitalists and states exercise their power unilaterallyfurtherexacerbatingconflict in an alreadycompetitive environment.In the present transition, the volatility of the internationalfinancial systern reached a critical point in the 1970s when the US government could no longer control global dynamics anddecided to deregulate and aid in the increasing strengthof the market over the state in the hope of benefiting from this transformation. For instance, the floating exchange rate, which was basically a decision to let the market decide the exchanges, gave the US monetary authorities a free hand in determining world money supply and interest rates. Americanunilateralismhas increased the uncertainty arising from the markets, and furtherrnore has even encouragedthe it formation of new markets dominated by uncertaintysuch as the Eurocurrencymarket and various futures markets [Strange 1986:106]. For instance, the Eurodollarboom in the 1970s, in addition to the huge surplus of Petro-dollarsfrom the OPEC since 1973,51 forced the commercial banks to find outlets for these surpluses in needs of states, especially the US and third world countries. On the demand side, third world countries eagerly engaged in rapidindustrialisation,had highl incenitives to borrow money in the 1970s because of the extremely low interest rates (tlie [LIBOR rates in 1974-77 were real negative). Consequently, wlhenthe US budget deficit put upwardpressureon real interest rates, that rose in the 1980s, the debt

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service burdenof thirdworld countries dramatically increased. An international(lebt crisi3 brokq out that put tremendous pressure on US multinational banks. Then there was the dramatic securities marketcrash in October 1987. The craslh of October 1987 may have been a signal of thie limits of expansion within thieold regime, somewhat akin to the boom and bust of the 1920s whiclh came in the wake of major structuralchanges in the econiomy of the US. Whiclh, in turn, has furtlher parallels

with the crises of 1873, 1720 and perhaps even 1634-37. The first analogy is thatin all these instances major trouble was confinied to and/orbegan at the futurecentre anidthe growing sectors of the world-ecoilomy and it was this centre and the ascendent sectors that bounced out of the crash thiequickest, confirming Braudel's rule of the thumb (Section jI). It is no mere coincidence thatin the 1920s, industries suclhas RCA, GM and the utilities that spearheaded a series of innovations in technologies, organisations, andmethodsof financing,also led thespeculative boom in the stock market. New organisatioils, and products fed a rightly placed optimism about future incomes but without the benefit of newer tools to evaluate such expectations accurately.They were changes outside anyone's experience making it impossible to define market fundamentals. Similarpotentialities andyet difficulties to concretely evaluate opportunities for profit was also thie basis of the 1873 crisis in US railroad securities. The railroads, which had previously provided only locally integratedsystems of transportation, were being forged inito a nation-wide network parallel to the unification of the utilities in tlwe1920s, creating great expectations. Speculation and collapse born out of genuine difficulties in evaluating market fundamentals was also at the root of the SouthSea Bubbleof 1720 andtheTulipmania of 1634-37. IlTe South Sea Company's plannedconversionof governmentdebtfrom a mass of highly illiquid annuitiesinto modernsecurities along with the influx of a mass of investors were both quantitatively and qualitativelya new phenomenathatmade it difficultto evaluatethefundamentals, though the associated excitement about shares in the London market correctly predicted the future centrality of that market. Similarly, the arrivalof the tulip from the Near East as a new asset in Dutclh markets,along witlhthe dramatic extension of practices of slhareholding and -trading and the associated influx of new investors led to the speculative boom and the consequent collapse, once again colTectlypredictingAmsterdamto be the new centre of accumulation and a market in sharesas the new means of reshuffling of surpluses [White 1990: 235-40]. Secondly, thlecrises of 1634-37, 1720 and 1873 primarily affected the emergent hegemon

andall of themcould be said to be a product of overentlhusiasm about the prospects of themarketin the new centres-UP, UK, and the US respectively-nonetheless correctly signalingthe trendsof the future.They were all instances of overshootingan essentially correct assessment. In all three cases the marketexhibitedlan awareness thatCsomething new andlpromisingwas on but failed to evaluatethe exact extent of thatpromise, whichi is not at all surprising given the inadequacyof old systems of information and for gatlherinig regulation whatwerequalitatively new phenomena. NYSE's boom The and bust in 1929.similarly predicted the centrality both of the NYSE and company financing throughsecurities. However, the fargreaterglobal effect of thecrashof 1929, comparedto othercrashesun'der discussion, may have beenbecauseof theoverlapof this signal crisis with the terminalcrisis of the In transition.52 thathistoricallight, could the boom and the bust of 1987 be similarly characterisedas a case of overshooting an essentially correctfuturetrajectory? may It be relevantthat,in termsof themagnitudeof the boom it was the Tokyo Stock Exchange that led the way [Wood 1989:57]. In that case, the near global simultaenity of the crisis of 1987 may have been a productof the global electronification of exchanges and computerised trading rather than the sign of a terminalcrisis. Since such booms andbusts are the product of things new and 'unknown'and are a result of the inadequacyof old information andregulatory systemsit is doubtfulwhether such instabilities can be prevented in the presenttransition.Changein fundamentals, with thearrival eastAsianfinancialpower of andJapaniese style corporations, greater and globalisation would make it so much more difficult to legislate or regulatefuturecrises out of existence, notwithstanding Brady the Commission's attemptto introduce circuit breakers. Only new informationandregulatory systems can stabilise the newly configured marketfor any length of time and we may lhaveto go throughthe purgatoryof a long crisis to institute these new mechanisms, andin all probabilitywe can only do that after all attemptsto tinkerwith tlheold system is exhausted and their limits made evident to all. In the long run, the crash of 1987 may registermore as a signal crisis of the transition, akinito the crisis of 1873, 1720 and 1634-37, ratlher than as the terminalcrisis of 1929.Inthatcase we have a long transitionahead of us. rate instabilities, international Exchanige debt crisis, bankfailures and stock market crashes that are alreadyupon us today are of expressionis financialexpansionthathave historicallybeenassociatedwithhegemonic transitions. remainsto be seen whetllerthe It big financial powers like Japan,Germany the can anld UJS collectively lead the system

or, as in the past, one pre-dominant power hlasto emerge to establish order. Of course the system can go on for a long time in the present state of festering crisis and partial solutions. All depends on the evaluation of the costs of the present crises by influential capitalists, policy-makers and states. Comparinghegemonic transitionswe can notice othierparallels beyond financial expansion, chaos, intensifying competition, and non-congruenttrajectories.Firstly, the obvious: all financial transitions are born out of a reconfigurationof tradeandproduction. When the centre of gravity of trade moved from the Baltic to the Atlantic, London replacedAmsterdamas the hegemonic financial centre. By the late 19th century with furtherindustrialisation and the making of national and continental economies the centreof gravity moved from Londonto the US. Today, as the primary engine of capitataccumulationmoves to east Asia and the Pacific Rim, east Asian financial markets have emerged to share the spoils with London-Paris-Frankfurt and New YorkChicago in a tripolarworld. Secondly, with increasingcompetition anddeclining profit rates in manufacturing and trade during transitions, we witness a marked tendency of capital to withdrawinto financial speculation. As wages andtaxes rose, Amsterdam merchantswithdrewfrom tradeandproducthe tion to invest in British bonds,53 British, in turn, became an increasingly rentier nation once the railroad boom was behind them by the middle of the 19th century, and in thepresenttransition,with decliningprosperity in the real economic sectors after 1968, realestate dealings, currencyspeculation andjunk bondpowered corporatetakeovers seemed to be the only sectors to show anyprospectsof expansion. The speculative boom of the Dutch withdrawal lasted the longest from circa 1660 to circa 1790, while the financial boom of British decline lasted throughmuch of the second half of the 19th century into the interwar years, and the Americanspeculativeboonm lastedabout has two decades in the last 20th century. Yet thereare differences. When the Dutch withdrew from production they invested massively in English bonds, shares and mortgages reaching a peak between 1740 and 1780, similarly when the British withdrew to the relative safety of high finance they showed a markedpreference for American investments, yet, when American corporations beganto withdrawinto financialspeculation they depended on the Japanese to finance the deficit at home (which addedup to over a hundredbillion dollars a year in investments and purchases of Treasury bonds). By 1982 Japan had become the major exporter of capital and the US had become the leading recipient of foreign capital [Sassen 1991:3940]. This reversal of capital flows in the present transition,

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from an emergent centi-e to a declining state could be after the second world war. of centre,may be symnptomatic largertrends Whoever emerges as the new leader and institutionalorderis establishedit contrary to historical precedent. Tlhirdly, wlhatevcer is going to be so much more difficult this extensive warfare has been commoin during past hegeinonic transitionsin hasteningthe time round because of the extraordinary decline of the old anidthe emergence of the troubles of the only real conti4iental new. Thlc150 odd-years of warfarefrom the economy-tlhe US-wliclh is at the moFirst Anglo-Dutch War (1652-54) to the ment going throughnot only an exceptionNapoleonic Wars (1790s-1815) were cru- ally deep recession but also the end of a 40cial in weakening the Dutch andstrengthen- year boom. The recession will of course end ing the British financially, the latter being but the question is can a new plhaseof longrelativelyprotectedby its islandstatus.Simi- term expansion be broughtabout?Orderin larly, the two world wars were central in the financialsector helps buttherecan be no transformingGreat Britain from a creditor hope without growth in the real sector. to a debtor nation while doing the opposite Policy prescriptionsfor the latterare not at of for the US whiclhenjoyed an analogousgeo- all clear since the exlhaustion thestimulastrategic insularity. The relative geopoliti- toirymedicine of Keynesian deficit spendcan cal weakness of Japan and Germany vis-a- ing. Keynesianiism no longer work bereduces the cause the strengtheningof global markets vis the US today, on one hanid, state possibility of a system transforming war in vis-a-vis nationial hasreducedthepower the core, and on the othei lhand,gives an of statesto effect countercyclicalmeasures. unprecedentedadvantageto the U1Sgovern- Moreover, where state spending already ment in extracting protection money from takesover halfof the nationalincome it is so so theseclienits as to extendits 'belleepoque'. muchdifficult to intervenein comparisonto Further,a higlhdegree of sophistication of when states absorbedonly about20 percent technologies of warfarethatensuresmutual of the nationalincome in the 1930s. Thatis; of destruction,in all probability, excludes the thereis alreadyan overburdening bureauand possibility of any extensive warfare in the craticmachinery budgets[Strange1986: core during the currenthegemonic duel. In 98]. In the financial sector itself, the presuch a case aggression could be turnied dicaments facing the US appear to be unprimarilytowardsthe south, as shown in the solvable in a stagnant world-economy. It Gulf War and continued UN belligerence appearsthatthe two deficits, the budgetand towards Iraq, with complex ramifications the tradedeficit, thatpose the biggest threat for intra-core struggles between the US, to the internationalfinancial system are at Continental Europe and Japan. Nonethe- the same time, to some extent, essential to less, in the 1980s and the 1990s we have maintainthe presentworld order.The budof witnessedthe transformation the US from get deficit needs to keep expanding for a the world's largest creditor to the world's while so as to keep the US financial system largestdebtorwithout the usual intermedia- from collapsing as the culTent recession tionof a global war.Fourthly,all hegemonic increases social spending including health states at the end of their hegemonic cycle care costs, andas thedeepeningS and L and have faced acute fiscal crisis due to one or a bankingcrises absorbsmore and more fedcombinationof factors that include declin- eral money. RefelTingto the troublesin the ing productionat home (hence taxes), geo- financial system in the 1980s none other political over-extension (hence expendi- than William Seidman, clairman of the tures), and costs of accommodation of so- FederalDeposit InsuranceCorporation,iscial demands for redistribution. Through sued the followinigwarningin 1986: the 18th centuly tax revenues of the United The financialareais probably,next to nuclear Provincesfailed to keep up with the interest war,the kind of areathatcan get out of control, on the public debt that put upwardpressure andonce out ofcont rolcannotbe containedand will probably do more to upset the civilised on interestrates furtherworsening the situworld than about anything you can thinkof ationuntil it reachedabout 10 per cent when [cited in Finianicial Tines, May 29,1986]. the Dutch state simply went broke. Similarly, in the early 20th century the Britishi The political economy of the Reaganyears state had to introduce 'income tax' to meet has devastatedstate revenues. While creatthe demands on the state for basic social ing a generalised anti-tax hysteria it has services, infrastructuraldevelopment, and quadrupledthe deficit not only because of and counter-cyclicalmeasures.Eventually,even militaty-keynesianism theconsequenices that was not good enouglhand the Britislh of deregulationon S and Ls, etc, but also state had to be bailed out by their riclher because of cuts in tax rates in suclhareas as cousins. Today, the US is faced capitalgains, thatfell from 39 percent in the transatlantic with a similar fiscal crisis but the sheer size mid- 1970s to 20per cent in 1981, andtle top of thiedebt anidthe budgetdeficit makes it a individualincome tax riatefrom 70 per cent more intransingent problem. TIhre is no in 1980 to 50 percent in 1981 anzd to 28 then way thlatthleAmerican state can eithlerbe percenitby 1988. Consequently,tlhough the allowed to go broke like thveDutchlor be top 1 per cenltof thle US hlouseholdsdid extentthat theBritish increasetheirshareof total incotne taxpaid subsidisedto thlesame

from 18 per cent to some 27 per cent, their proportionateshare of family income rose even more from 8 per cent to between 13 and 14 per cent of the total [Pllilips 1993]. That has fed the political and economic bifurcation of Wall Street and Main Street wlhose most visible short-term consequence lhas been Bill Clinton's storming of the Republican bastions of the suburbia. The trade deficit appearsto be equ'allynecessary for a while so as to keep the rest of the world, especially the Latin American countries, from defaulting on their loans by providing them access to the US market so that.they can earn foreign exchange to service their debt [Sweezy and Magdoff 1988:54]. It appearsto be an insoluble clilemma for the declining hegemon and anlissue that has to be addressedso as to restabilise the international financial system under a new
hegemonic regime.

Beycondthe similarities and differences between transitionsandthe ensuing struggle for hegemony there are interesting secular trends to be noted about the evolving capitalist world economy as a whole. Thne 17th centuiy monetaly regime'of the European world-economywas characterised,first, by a constant drainage of specie from Americas via Europe, to Asia and, seconid, by Amsterdam's quasi-monopolistic control over Europeanliquidity. In the course of the 18thcentury, control over Europeanliquidity was recentralised in London and the constantdrainageof specie and other monetaryinstrumentsfrom west to east beganto be reversed. The control exercised by London over internationalmeans of payments in the 19thcenturywas probablytighterand more extensive than that exercised by Amsterdamin the 17th and 18th centuries. The.drainage of means of payments from west to east was completely ieversed as the financial expansion of the late-19th and early20th centuriespromoteda majortr'ansfer of liquidity in the form of loans and investments from Europevia ILondon to the Americas. Consequently, the indebtedness incurredby Europeanstates, including and especially the UK, during the first and second world war vis-a-vis the US boosted this drainageto such an extent thiat, the end of by the second world war, control over world liquidity was almost completely centralised in the lhands US governmental and busiof ness institutions. Today, we have come aroundfull circle anclthe drainageof monetary instruments is eastwards across the Pacific to east Asia. nis relocation of control over world liquidity was institutionalised at Bretton Woods. Under this regime, the fiction that worldmoney is a commodity like any otthcr, the supply of whichican be left safely in private hanlds-as in different ways it lhad been under th- e Dutch- and British_ regimes-was abandonled. Controlover the

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world supply of means of payments, including its distributionamong political jurisdictions, was entrusted to select central banks of thatacted in concert underthe leaderslhip the US government and its FederalReserve System. The trend seems to be reversed today. For people only a little more than a decade ago, today's speed and scale of commodificationof money is beyondimagination. As de-regulation has strengthened the market vis-a-vis states, it has basically postponedthe day of confrontationbetween the 'self-regulating market' (in Polanyi's sense) andthe political, legal andregulatory supportthat money needs from states. It is towards this confrontationthat the international monetary order is headed. The recent travails of the EuropeanCurrency System and the inability of the European central banks to stem the speculative assault on the pound, the lira and now the franc makes evident how central banks, so powerful underthe Bretton-Woods system, can no longer control the intemational system. It is said that the combined foreign exchange reserves of the most important centralbankstoday amountto no more than a trillion dollars which is the value of the daily market transactions in international currencies, which is about 25 times the value of world trade! In New York alone, daily financialtransactionsamountto about one-fifth of the annualGNP of the US! The strengthof the Eurodollarmarket which is -beyondthe reach of any particularstate, the entry of new east Asian actors under Japanese leadership, and the increasing influence of non-banks like mutual funds and private actors over world liquidity has created fundamental problems of governance of the internationalfinancial system. It is an open question whether new regimes and institutions of governance would be put in place orthe capitalistworld-economywould continueto lurchfrom one crisis to the next, postponing any systemic overhaul. Much woulddependon the possibility of the emergence of a new hegemonic power, in all probability centred in east Asia, or a hegemonic world government with new multilateralinstitutions of governimce. In that context, the question on everybody's mind is: could Japan be the new hegemon and establish order in the Historically,all thethreehegemons system.-" have been leading creditorsto the world for much oflhe period of their financial dominance. They have also controlled the key of public financial institutionis their age and finanicial institutionshavedomitheirprivate nated the intemational marketsof theirera. Moreover, their respective currencies-tlhe Bank of Amsterdam's guilder, British sterling, and the US dollar-have acted as global currencies. With some limitations and differences the Japanesehave begun to play many of these roles in the 1980s.

Most dramatically,since 1985, Japanhas emerged as the world's largest creditor amassing external assets to the tune of US $ 328 billion by the end of 1990, which may have greaterresonance because it has been paralleledby the fall of the US into a debtor position." The majorityof Japanese tiunds have been lent to the US firms and government, on which, unlike other emergent hegemons, Japanis economically andmilitarilyheavily dependent.On accountof this unprecedentedsituationsome scholars like Susan Strange have claimed that the emergence of theUS as the world's largestdebtor may be a sign of its strength, especially because the Japanese state has exhibited very little influence over Americanpolicies [Strange 1990]:6 That may be changing. For instance, aroundmid- 1987 there was a Japanese pull-out from American investments, that some have describedas an officially sanctioned capital 'strike', so as to force the US governmentto correctits fiscal deficits andin November 1987 theJapanese minister of finance publicly called on the US government to raise taxes [Helleiner 1992:434].Then,in April 1988, atthe fourth annual meeting of the US-Japan Working Groupon Financial Markets,Japaneseofficials demanded for the first timiethat the same amount of time be spent discussing Japanese concerns about American financial marketsas was spentdiscussing American demandsfor furtherJapanesefinancial reforms.57 late 1989 the governor of the In Bankof Japan,YashushiMieno, instituteda tight monetary policy after he reached the decision thatthe financial costs of supporting the US had become too great and he raisedinterestrateswith intentionsof bursting the Americanfinancial bubblein which equity andlandpriceshadtripledsince 1986 tHelleiner 1992: 436]. Japan'smore active role in Americanaffairssince themid-80s is symbolised by the holding of the annual meeting of the Inter-AmericanDevelopment Bank in Japanin 1991. Such symbolic events,demandsandactionshavegone handin-handwitlhincreasingJapaneseinfluence at the institutionalloci of the exant international financial regime. Increasingly acrimonious debates have brokenout between the US and Japan over voting powers in multilateral financial institutions like the and IMF, the I13RD the Asian Development Bank with increasing concessions to Japanese financialclout. In a two-prongedstrategy, in February1991, thieBank of Japan organiisedand hosted a meeting of central bankersfrom Thailand,Malaysia, Indonesia, thePlhilippines, Australia, New Zealand, and South Korea (along with promises of anniualmeetings in the future), so as to institutionialiseits regional financial preeminence along with greater international assertiveness. Displayinganother lhegemonic symptom,since 1986, Japanhasbecome the

largest bilateral aid donor for some 25 developing nations over whom the Japanese ministryof finance has enormousinfluence. So it must be concluded that Japan's financial presence is not only increasing vis-a-vis the US economy and state but is also being felt in multilateralandregional institutions, in tune with its ascendant trajectory. Japan's piivate financial markets and institutionshave acquiredincreasingweight in the internationalarena.By the late 1980s, Tokyo's bond, foreign exchange, and equities marketslhad begun to challenge their all New York counterpartsin size.58By 1989, Tokyo's share of internationalbankingactivity had grown to be the largest of any financial centre. Japanese banks, for instance, hadcome to control 35 percent of all internationalbankassets by 1988.51 bankIn ing, of particularimportanceis the Japanese Postal Savings System that controls almost one-third of the nation's savings making it the world's largest banker and giving the Japanese state the potential capacity of effecting the internationalfinancial system in a major way analogous to the effect of the Bank of Englandwith Briti$hdeposit-banking network behind it in the 19th century [Helleiner 1992:442]. In terms of the status of the yen as an international curfency it is perhaps in the worst relative situation compared to the guilder,the sterling andthe dollar in comparable phases of their respective hegemonic cycles: Low yields andinsufficient liquidity of Japanese treasury bills have dissuaded investors from holding their assets in yen. Approximately 8 per cent of the world's official reserves were denominatedin yen in 1989, in contrast to 19 per cent for the German mark and 60 per cent for the US dollar. Only 4.3 per cent of world tradewas denominated in yen in 1989. Of course, things arechanging for the betterfor the yen but the US continues to derive massive seignioragebenefitsfromissuing theworld's most used currency and greatly benefits from being able to borrowfrom Japanin its own currency-a situation without precedent between the world's largest debtorand creditor [Ilelleiner 1992: 429]. Till the mid-1980s, Japan's power was used to support the American-centredglobal financial regime. Most importantly, Japan'senormouscapital exports supported the externalcurrentaccountdeficits and the internal fiscal imbalanicesof the US. Yet, the situation lhassome parallels with past transitions,especially in termsof continued Japanese dependence on the more highly developed financial marketsof the US. British bankers and traders, for example, had alreadybecome key global actorsin the 18th century when they continued to use Amsterdammarketsandin 1763 came to the aid of latter. Similarly, the inadequacies of New York financial markets ledlAmericanl

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merclhantsand financial operators to continueto be overly depenident Londonwell on into the 1920s, by when they lhadalready amassedmore than25 percent of the world's gold reserves. I'he American state initially deferred to the Bank of England's greater gold expertisein rebuildingthe international standard and even at the Bretton Woods conference, the British were still boasting thatthe Americanshad "all the money bags, but we have all the brains" [cited 'from Helleiner 1992: 434]. Not at all dissimilar to
American claims vis-a-vis the Japanese today!

Commensurate with its financial power Japan is becoming increasingly assertive, andgiven its greaterdependence.onimports and exports it may turn out, Helleiner argues, that the Japanese would be better at reinstituting an international financial regime. Thereare otherreasons why the Japanese could do a betterjob. One is the freedom from diplomatic and military obligations of a superpower.Thatwould be in line with the Dutch position in the 17th and 18th centuries.Similarto the Dutch, theJapanese would be less constrained to subordinate theirrole as financial leaders to geo-strategic objectives. Caught between Franceand Englandthe Dutchmaintainedneutralityfor a long time and attemptedto divorce diplomatic considerations from the needs of internationalfinance. At the presentmoment, for instance, the Japanese appear to have fewer qualms in dealing with the postTiananmenClhineseregime than American andEuropeanoperators.Moreover, the Tokyo financial community has much greater say in the policies of the Japanesestate than New York financiersever hadon the American state. Thatis analogous to the influence of the city on the British state and the Amsterdamplutocratson the Dutchstate. In addition,the rapidexpansion of Japan'said programme and her dependence on east Asian economies places her in a betterposition to address the financial mess between the north and the south, so crucial for any hegemonic regime today. As Dennis Yasutomoobserved: "Japan'scontribution to the solution of the north-south issue througlhaid giving is becoming a raison d'etre of Japan as a 21st century international state."' Then, in line with Japan's more interventionist and managerial tradition in economic institutions, the new Japanese international regime, if one does emerge, would be different from the "free markct" ideological inhibitions of the past three hegemons. Within a decade or so the financialvisionifortheworldwould Japaniese also have to come to terms witlha vastly
stronger Ewuopean central bank and ecui,

in regime usher-ing perhapsa moremultipolar thanever befor [flelleiner 1992:43944J. e For the first time in its long histoiy there is a possibility todlay th.at the centre of accumulationwvould shift to the east, yet the

13 That was ensured through the elaborationof what McNeill calls the 'military-commercial complex'. See, McNeill 1984: 86-87, 90-91, 120-22, 126-3 1; Brewer 1989: 7-8. [Thispaperis a slightly alteredversion of the one producedfor the FernandBraudel Centreunder 14 Tracy (1985); Riley (1980); Plumb (1965). theguidanceof GiovanniArrighi, TeFence Hopkins 15 Forthe characterof the Dutch ruling elite, see Roorda(1964) andvanDijkandRoorda(1976). and Immanuel Wallerstein and funded by the 16 Usually, as Braun suggests: "the more adMacArthur Foundation. I have benefited imvanced states are, the more deeply they are in the mensely fronm comments of IftikarAhmad, debt.without being insolvent" (1975). InterKen Barr, Shuji Hisaeda, Karen Ireland, Tom estjngly, Braudelprovides a roughestimateof Riefer, Khaldoun Samman, Steve Sherman, the historical limit between a healthy public MinwinShih,BeverlySilver,andEricSlater.This debt and insolvency, at about twice the size of paperwould not have been possible, withoutthe the GNP (1984: 307). Thatraises an interestwork of P K Hui from which much of Section III ing question about the limits of the American is drawn, and the encouragementof Katherine debt burden in our contemporary worldCesarini. It has greatly improved as a result of economy. criticismfrom an anonymousrefereefor the Eco17 See Harper(1939). nomic anUdPolitical Weekly.] 18 For further elaboration on the tools of the 1 Which is not necessarilyEurocentric. English challenge to Dutch domination see 2 For a generaldiscussion on financial centres Faber (1966); Astrom (1960); Davis (1969); and leadership by a particular centre see Rankin (1969); Omrod (1975); Chaudhuri Kindleberger (.978:66-134); Braudel(1984: (1978);Wallerstein(1980;andConquest(1985). 25-45; 89-276); Smith(1984: 985-1005). For a theoreticallyinsightfuland empiricallyrich 19 For elaboration see Curtin (1968); Lovejoy (1982); and Klein (1990). description "globalcities"asfinancialcentres of 20 For the long historical prodesses involved in in ourcontemporary worldsee Sassen(1991). the creationof the Britishnationalmarket,see 3 Forfurtherelaboration thisthemesee Arrighi on Braudel(1984: 352-79). (1990). 21 See Dickson (1967); andDickson andSperling 4 For a general theory of financial crisis see (1970). Minsky (1977, 1982), Altman and Sametz Holland'sdebt-revenueratioalso (1977), Strange(1986), Kindlebergei(1978), 22 Interestingly, peaked at 17 around 1720 (Riley 1980: 77). and Wolfson (1986). 23 Therehas been an extensive debateon the size 5 See Kindleberger(1978). and natureofthe English nationaldebtheld by 6 Forgeneraldescriptionsof Amsterdamas the the Dutch in the 18th century.In 1737 a govcommercialentrepotsee Barbour(1950 edn: ernmentspokesman,SirJohnBarnard, oppos11-27, 35-41, 85-103), Israel (1990) and ing the motion to reduce the interest on thle Braudel(1984: 175, 236-241). NationalDebt, quoted a figure of ? 10 million 7 For a succinctoverallpictureof worldbullion to representthe Dutchholding, arguingthatif flows between 1450-1800 anda discussion of interest were reduced the Dutch would withthe major sources of these calculations see drawall theirmoney with catastrophicconseBanett (1990). 8 The wisselbank's stock of precious metals, quences (Wilson 1941: 72). The consensus, for long, was that by 1776 the Dutch owned 'amountedto 0.9 million guilders in 1610, about three-sevenths of the British National about 11.8 millionguildersin 1645 and about Debt. Carterhas shown that assessment to be 10.6 million guilders in 1650, fluctuating an exaggeration, and she estimates that in between 7-8 millionguildersduringthe years reality it was somewhere between one-sixth 1651-1686, and between 7-20 million guiland one-eighth. From about 1760-1783 the ders duringthe years 1687-1720. In the first

half of the 18th century these stocks reached west retainsits monopolyof violence, so the dramatically high levels, about25 millionguilquestioni will the west allow theinevitable is ders in 1721-24, 31 million in 1764, and about to happen or will it be tempted to destroy 26 million guilders in 1765. But entered a capitalism so that it can continue to domiphase of rapid decline from 1783 (Attman nate the world? Thlereis panic in the west 1983: 41). anidthere is the typical apocalyptic pathos 9 For a discussion of the importance of the about the coming centurywith a hint of the companies for latercolonialism, that lies outend of the 'civilised world'. So let us give side the scope of this paper, see Masselmann the last word to the TimesLiterarySupple(1963). 10 This is a feature that would repeat itself on, ment (that sentinel of western culture): many trade roibtesand has been termed by Britainand Irelandcould respectivelybe Hicks as "the tendency to diminishing reJapan's HongKongandMacao,well placed turns" (1969: 45, 56, andpassin). for the European entrepot trade,the United 11 For the general crisis of the EuropeanworldStates will be Japan'sfabulouslywealthy economy that coincided with Dutch financial India,terredes merveilles,while Australia expansion, see Aston (1965),- Hobsbawm can be Japan's Australia,land of rugged (1965), Trevor-Roper (1965), Schoffer(1966), adventure heavydrinking, appropriand the vanDillen(1974),KrantzanidHohenberg(1975), ateplaceof exile forJapanese dissidents and de Vries(1976), andTePaskeandKlein(1981). remittance men.Thiswouldleaveonlytable 12 For a refinement of the traditionalidea of a scrapsfor the others:Holland,perhaps, for 'militaryrevolution' in 16th ceiltury Europe, see Parker 1976. For the increasing size of the Indonesians, France the Vietnamese for Europeanarmy,see Parker(1976: 205, Table [howawfulindeed!](Sayle,April28, 1989, 4) and for the size of navies, see Kennedy Times Literary Supplement, cited in (1989: 99). Cummings, nd).

Notes

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p,-101

24

25

26 27

28

in proportionof solid Dutch nmoniey the English funds remained between ? 25 muillion and ? 30 miillion.She has also challenved the Duitch snmall share thesis thattherewere nmany holders of Britishdebt. She argues thaitit was above usually held by those with invenitories 20,000 guilders (1975: 22, 25, 28-31, 40). of Theimportance theAmsterdam capitalmarket for British finances was not lost on conitemporaries. Astier, the French consul at Amsterdam,reportedwith considerable chagrin,aboutbigEnglishloans in the Amsterdam marketin 1760. Astier remarked,that in the given context, it was not difficult to understandwhy the Britishhadof latebeen showing increasingrespect for the Dutch flag. French, DutchandEnglish observersconcurredon the importance of Dutch capital and speculated aboutits probableeffects on the Anglo-French struggle. Luzac, a Frenchman,believed that Dutchneutrality(dominantbetween 1713-80) and Dutch capital had assisted England in its fight to dominateEuropeand India.He argued thatwithouit Dutchcapital, Englandcould not have maintained such an immense navy, a land army in Eturopeand a great numberof troops in the rest of the world and provided subsidiestosuLstain influence[Wilson1941: her 70-7t1 also, see Sherwig 19691. An observationby a Dutchmnan trom Leyden 1984: 269. Forfurtherdetails cited in Brauidel aboutthe crisis of 1763 see, de Jong-Keesing (1939). See Braudel 1984: 269; Kindleberger 1989: 136-37; Wilson 1941: 168; Carter1975: 63. In contrastKindlebergerarguies the locus that of a crisisdoes not nec. -s.erilyoverlapwiththe hinge of the systenm -,: 190-91). (19) See Keynes (1913): for the role of the empire in the British trade r-egimein general, see Cairncross (1953), Chaudhuri 968X!Crouzet (1

from grain to meatproductionand the development of refrigerator ships in 1875 1985:228-29]. Duringthe cri[Kindlceberger sis of 1890 Britishinvestorsfotund thenmselves locked into Argentinian investments which c6tuldbe sold only at very low prices if at all. Ilowever, these investorswere able to realise cash in order to meet their commitmentsby selling UsSrailroad bonds, which were absorbed by US investors not involved in the Argentinianinvestments [Michie 1987:2411. To tide over the immediatepanic the British state, in addition to the donmestic guarantee, not arrangedfor the Russian governnment to drawits ? 2.4 milliondeposit fromBaringand a loan of f1.5 million from the State Bank of Russia and another loan of ? 3 million the Bank of France [Kindleberger1978: 1881. 37 In 1914 importsfrom the United States were 18 per cent of British inmports; 1918 they in were 39 per cent of the total. ly 1916 almost all Britishimportsof munitions,ironandsteel, oil, cottonandgrainwere coming fromthe US [Milward1984:55, 641. 38 In 1914, Britishtradedeficit was ?170.4 million. In 1915 it was ?367.9 million, in 1918, ?783.9 million. The visible tradedeficit with the UnitedStates in 1918 was f488.9 million [Milward1984:551. 39 As a result of the war, 'Jeixcept for British DominionsandColonies tiponwhose borrowing the Colonial Stock Act of 1900 conferred preferentialtreatmentor whio continued to borrow in London for political as much as econonmicreasons, for much of the 1920s LondonandNew Yorkwere in very realcompetition in the flotation of overseas loans [Eichengreenand Portes 1986: 6021.
40 "... more than 55 per cent of total British

44

45

46

47 48 49 50

(1975) anid Cain (1985). elabor-ationion the associated issue 29 For fLurther of clemonietisation of gold in Inidia so as to direct flow of gold to London and then Inidia's absotptioni of huge quantities of sturplus silver

that stemmlied world inflation see, de Cecco

(1984: 62). 30 For further eltboration, see Sen (1992)). 3 1 See Fisher (1969). 32 One rix-dollar was equal to 24.38 grams of

investmiient the period 1871-1913 was diin rected overseas. World War I occasioned a considerableliquidationof Britaini's external assets, and in the second half of the 1920s the share of new capital issues for overseas borrowers dleclinedfrom its pre-war raitge in excess of 50 per cent to 37-44 per cent before slumping to very much lower levels in the 1930s... In contrastto Britain,America's foreigni assets doubled over the course of the war and, after fluctuating in the immediate postwar years, soared in the mid-twenties' [Eichengreen and Portes 1986: 601-03). 41 Also see Kindleberger (1988: 55, 73-82); Drumiimond(1987:40); Fearon (1979:36). 42 Kindleberger argues that it was the unwilling-

Sl

52

33

34

35

36

silver. English mlerchants ships ultipLure and mately acquired two-thirds of the gold that in arrivedin Porttugal exchange for cloth and corn. The Brazilian gold boono would last fronm 1695 to about 1770 (Phillips 1990). Withinthe Briti?h system the Scots arereputed to have pioneered nimny the 'modern' feaof tures [see Checkland 1975; Cameron 1982: 107; Kindleberger1984: 83]. See Clapham (1966). The Bank controlled approximately58 per cent of all banking assets in England and Wales in 1800, about 36 percentin 1844[Cameronetal1967:34,42-451. For a general descriptionof the role of the city of London or the "minld of the city" see Checkland(1957). See the table comopiled by Chapmanconcerningthe nunmber amount and of loans marketedby the Rothschildsand the Barings (1984: 16, Table 2.1). Tlhevortex of the crisis was London. London financed the boom in the securitisation of domestic companies.ssulch aOs GSuinne.ss. bult especially in Argentinianland based on exag.geratedexpectations of p)rofitwith the shift

53 54

ness of the US governnment take up the to

leading role which caused the collapse of the world-economy in the early 1930s (1973:28).

55 56 57 -5 8 59

flowever, it is nlotat alllclear whetherthe US econiomy had the financiailstrength at that ite point to tinderwr the inteniationalfinancial system given the relativelylinmited of-doluse
lar as ani interniational cunrenicy and the coni-

dependon free trade[Dnummond1987:36-37; Fishlow 1986:79;Fearon1979:41]. In 1927-28 Americancapitaloutflows were of the same orderof magnitudeas the American current-accountsurplus. But these outflows then began to fall, so that in 1930 they barely financed half of that surplus. In 1929 the US injected $ 7,400 million into the world economy by its puirchaseof goods and services and its investmentsabroad,but by 1932 this figurehad been reducedto $ 2,400 million [Fearon1979:51). In 1931 things became still worse; while continuing to run a current-accouIIItsurplus the American econonly pulled immense sums from the rest of the world, so thatAmerica's capitaloutflow became a capital inflow [Drummond 1987:39]. During 1946-58, 143 US subsidiarymanufacturitng firms were established per annum abroad, while during 1959-67, the number increased to almost four times to 566 per annum.By 1966, there were nearly 9,000 US subsidiaries in western Europe, over three times the numberin 1957 [Glynet al 1990:991. The growth of the Euromarketscontinued in the 1980s. In March 1988, the gross size of the marketwas estimatedat $ 4,560 billion, which was much higher than $ 485 billion in 1975 [Ilultman 1990:73]. Total US militaryexpenditurein the Vietnam war has been estimatedto be more than$ 140 billion (Miller 1986:56]. See Hultman(1990) and Itoh (1990). See Strange (1986). The factors that led to the stagnation of the world-econonmy, according to Itoh, were the failure to provide cheap and &cile workers andi maintain the cheap supply of primary productsfor the advancedcapitalistcountries from the third *orld (1990:53-54j, "Between a third and a half of OPEC's excess billions went to the Euromarkets,a total of $ 150 billion between 1974 and 1980" [Frieden 1987: 88]. It must be noted that the New York collapse was precededby the fall in the Lonidon market on (reactingto the failureof the Hlatry Septenber 20, 1929) and the fall in the Berlin market (respondingto tightercreditpolicies andflight of American capital to the NYSE). Wilsoni(1963). llTis sub-section is a nmere of paraphrasing the workof Helleiner(1989, 1992). Special thanks are duie to Thomas Reifer for drawing my attentionto this literature. Helleiner (1992: 423). For further arguments about continued US financial strenrgth Emniott (1989). see The Econiomist, April 23, 1988. Ilelleiner k1992: 426). Ibid (1992:427).

60 Yasuitomlio(Winter 1989/90): 490, inote No 3.

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Economic and Political Weekly

July 30, 1994